Nestle's outlook crunchy as ever, room for firm to go deeper into rural mkt

Focus on innovation, market share and product premiumisation seen boosting growth

Nestlé India, is well positioned to deliver healthy volume-led growth aided by widening distribution reach, especially in rural markets, new products, and recovery in modern trade, say analysts.

Rural accounts for about 25 per cent of Nestlé’s total sales — one of the lowest among consumer companies. With rural growth outpacing urban by two times, headroom for the company to deepen penetration in the hinterland is significant, say analysts at Edelweiss. To this end, the company has doubled its reach from 45,000 villages to 90,000 in the past 18 months and has also tweaked its portfolio to stay relevant in those markets.

Nestlé enjoys leadership in its core categories like baby foods, instant noodles and instant coffee. A key factor aiding the company’s return to double-digit volume growth in the September quarter was the enhanced focus on its core portfolio and ensuring a healthy supply chain after the Covid-19 led disruption.

The management has highlighted that innovation will remain key and may see a step up to address increased consumer demand. Ready-to-cook (RTC) is a big opportunity for the company, said Abneesh Roy, research analyst at Edelweiss Financial. “As work from home will continue in a milder form, we envisage Nestlé to benefit from rising sampling of its new RTC/RTE (ready to eat) products (upma, poha, breakfast cereals) as well as its new spice mixes for rice,” he explains.

Nestlé is also investing heavily in capacity expansion and plans to augment its manufacturing capacities and set up of a state-of-the-art green field project in Sanand, Gujarat, for RTC, coffee, confectionary and milk and nutrition categories. “This investment reflects high confidence in its ability to grow double digit compounding for several years, in our view,” added Roy.

The company is also leveraging its e-commerce channels as people prefer to shop from home during these times. Nestlé’s e‐commerce channel almost doubled in the September quarter, sustaining its strong performance, and now contributes about five per cent to Nestlé’s domestic revenue. A favourable product mix and increased digitisation among kirana stores is seen boosting the company’s operations.

Morgan Stanley estimates a modest EPS growth in calendar year 2020 (Nestlé follows January to December accounting year) of 10 per cent, before growing in the range of 18-19 per cent over CY21-CY22.

On the flip side, slowdown in consumer demand, adverse raw material prices and increased competition are the key downside risks cited by analysts.