Nestle India rating ‘Buy’: IIFL says volume growth makes a return

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Updated: Apr 23, 2018 3:41 AM

Focus on growth paid off with CY17 domestic volumes up ~8%, highest in 7 years; expect sales/EPS CAGR of 12/19% over CY17-20

Nestle India rating, IIFL, GST, FCF, maggi, KitKat, PayTM, google searchNestle’s focus on growth paid dividends with CY17 domestic volume growth of ~8% being the highest in the past seven years adjusted for Maggi ban.

Nestle clocked GST adjusted domestic sales growth of 11.8%, the fastest in six years; moreover, this was led by domestic volume growth of 8%. The company continued with new launches in all segments and Maggi grew volume 19% but is yet to get back to pre-ban level. Ebitda margin expanded 29 bps although gross margin declined as the company reduced overheads including ad spends. Nestle improved its working capital to minus 23% of sales which resulted in FCF at 151% of net profit. Maintain Buy with price target of rS 9,500.

Back to growth

Nestle’s focus on growth paid dividends with CY17 domestic volume growth of ~8% being the highest in the past seven years adjusted for Maggi ban. Although GST adjusted category figures are not available, the highest reported growth was clocked by prepared dishes and cooking aids at 17% and the lowest was milk products and nutrition at 4%. Milk products clocked a positive volume growth after five years of decline. The company launched about nine new products in all segments – notably Milo RTD and new variants of Maggi, Greyko, KitKat, Milkybar.

Balance sheet improves

The company improved its working capital by 237bps to 23% of sales due to lower inventory and higher pension provisions. ROIC increased from 91% to 246% and we forecast that invested capital could become negative in CY18. FCF to net profit was high at 151% and we expect it to remain above 100% for the foreseeable future. Dividend payout was 68% in CY17 and we expect it to go up as the company accumulates cash.

Story to continue

We expect 12% sales Cagr and 19% EPS Cagr CY17-20 as Nestle taps into the underpenetrated packaged foods market in India. Urban discretionary spending is experiencing an uptick and we believe that Nestle can benefit from this along with its focus on driving growth via new launches and improved execution. While expensive, the long runway for growth and high FCF generation warrant a premium. BUY

Overall performance

Performance in the milk products & nutrition and beverages segments was better than our estimates, whereas that in prepared dishes and confectionery lagged behind slightly. Growth continues to be volume led in CY17, similar to CY16. Volume grew 7.4% including exports (our estimate is that domestic volume grew 8%). Domestic sales growth on a comparable basis (adjusted for GST accounting) was estimated at 11.8%. Besides management’s concerted focus on volume growth, benign input prices in commodities such as wheat, milk and coffee also aided volumes this year. Note that the implied pricing growth this year is lower due to GST-related accounting. We estimate a similar volume growth going forward, coupled with 3-4% pricing growth.

Volume growth has been led by the prepared dishes, cooking aids (aided by continued Maggi ramp-up) and beverages segments. The milk products & nutrition segment registered a positive volume growth. Focus to address the micronutrient deficiency prevalent in India continued, with introduction of iron-fortified Maggi Masala noodles, fortified Nestlé a+ milk and Milo ready to drink.

Prepared dishes

Continued ramp-up in the Maggi portfolio resulted in an increase in household penetration and a consequent 19% volume growth in the prepared dishes segment. Revenue growth was lower, at 17%, due to GST accounting. Nestlé introduced new variants such as Atta Mexicana and OatsMasala, under the “Nutri-licious” brand, supplemented with benefits of protein and fibre. In a first of its kind marketing initiative, the company engaged with Google Search and PayTM as a platform for voting on the preferred flavours of ‘Masalas of India’ prior to launch.

Milk products and nutrition

Volume growth returned to the positive zone after a period of five years. Overall revenues grew 4% (in reported terms, probably higher adjusted for GST), driven by a 1.6% growth in volumes. The growth was a mix of existing products and encouraging response to new products.


Volume growth accelerated to 10.6% vs. 1% volume growth witnessed the previous year. Overall revenues grew 7.8% in reported terms. Growth was driven by various initiatives and activations such as “RJ Rishi campaign”, Cold Coffee initiative in summer, and new campaign for Nescafe Sunrise.


The segment registered volume growth of 4%, and revenue growth in reported terms was also similar. The company continued to focus on core brands through improved offerings and unique marketing campaigns.

Gross margin

Note that the company has discontinued sharing components of raw materials consumed during CY17. With focus to drive volumes, gross margin contracted by 70bps in CY17. Unfavourable revenue mix from higher growth in prepared dishes also contributed to the gross margin contraction during the year. We build in slight gross margin expansion on the back of pricing growth going forward.

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