Nestle India: New strategy could perk up future

Firm aims to grow in double digits; could see some pressure in near-term margins

When Nestlé India says the company is eyeing double-digit growth, it is bound to draw attention of people from across the spectrum. The double-digit growth — with strong focus on volumes and market share gains — in itself is eye-popping, given the fast moving consumer goods (FMCG) sector has seen low single-digit volume growth in recent times. Also, not long ago, Nestlé’s own track record was seen as wanting. In fact, data by analysts suggest Nestlé clocked weak volumes in s majority of the past six years, and the growth in revenue (again not exciting enough) was driven by price increases. Excluding calendar year 2016, most of which went in recovery from the Maggi controversy, the company’s performance is nothing to write home about.

Not surprisingly then, the Nestlé India stock was up by 6.6 per cent at Rs 7,030 on Monday. And if the company can achieve its stated goals, there could be more room for upside, even as valuations are not cheap. 

Nestlé held an analysts’ meet on Friday, where it spelt out details of the plan. This includes expansion of its existing product range and brand extensions, increasing penetration across categories, bigger distribution reach (4 million outlets currently), as well as focusing on innovation and premiumisation, in a cost-effective manner.

The change is also seen as a reversal in Nestlé’s earlier strategy of focusing on profit margins. Markets, over the longer run, typically reward volume-led growth with decent margins.

IIFL’s analysts say increased focus on sampling, ramp-up of distribution penetration, and slow pace on price increases make them believe Nestlé’s focus on volume growth is not just lip service.

 

Nestlé’s financial performance in CY17, so far, gives confidence. Analysts from Elara Capital say Nestlé reported real internal growth of 8.1 per cent year-on-year (y-o-y) and organic growth of 8.9 per cent y-o-y (reported growth of 8.2 per cent) in the first half of CY17, led by 9.3 per cent in domestic business (volume growth of 9.5 per cent/10.5 per cent adjusted for GST-led de-stocking).

New launches have accounted for about 25 per cent of revenue growth in recent times. The company has launched 43 new offerings since January 2016, of which a third were in the value-up category (premiumisation), say Edelweiss Securities’ analysts led by Abneesh Roy. “Key global categories for Nestlé like water, coffee machine and pet care are being evaluated for launch in India,” Roy adds.

If Nestlé can indeed clock healthy double-digit profitable growth, the stock could re-rate. But, the journey may not be smooth given the weak business environment and elevated competition. Also, there could be some hiccups on the profitability front as input costs have risen in recent months, while Nestlé has delayed some of the GST-related price hikes. 

IIFL analysts though put it well. “A likely sustained double-digit sales growth is worth the margin sacrifice. Moreover, gradual changes in the DNA of Nestlé India makes it a good long-term investment opportunity.” A correction could be a good entry point in the stock.