Nestle is creating distribution clusters to fill up white spaces in distribution and increase penetration to cater to small towns and interiors.
We upgrade Nestle to ‘accumulate’ from ‘hold’ given improved growth visibility led by initiatives like 1) cluster-based strategy to go deeper and sales increase in interiors 2) extending Maggi to new snacking products and 3) strong innovation pipeline and high success rates of new launches. Although most agri inputs have been moving up, NEST seems better placed given that 51% of input cost basket (milk, SMP, coffee and cocoa) is benign. This will enable Nestle to neutralise margin pressures on firming up of crude, wheat, sugar and palm oil, although margin expansion from current levels looks unlikely.
We estimate a 30% PAT growth in CY18 and a 14.7% PAT CAGR over CY18-20 mainly led by a double-digit sales growth and flattish margins. We value the stock at 46xCY20 EPS and arrive at target price of `10,996. We believe 18% correction in stock price provides a good entry opportunity for long-term gains.
Nestle is creating distribution clusters to fill up white spaces in distribution and increase penetration to cater to small towns and interiors. Nestle has divided India into 15 clusters which will enable it to 1) enhance local and regional involvement in decision making 2) enhance efficiency in reaching out to customers 3) rationalise supply chain and optimise resource utilisation and 4) realign its NPD planning based on regional tastes and preferences.
Maggi noodles will reach its peak volumes (before fiasco) by FY19 but with a 60% market share (70-72% before the fiasco). Post-rebuild, sustaining above teens volume growth in Maggi noodles looks challenging. Consequently, Nestlé has been extending the brand “Maggi” into other products (pasta, garam masala, soups, coconut milk powder, bhuna masala, magic cubes, etc) to reduce dependence on Instant noodles (85% of sales). Nestlé’s has entered low-fat yogurt-based “Maggi dips and spreads” in a small but high-growth segment.