Rural push, new launches to sustain growth trajectory for Nestle India

Valuations are, however, rich limiting the upside potential

After its third consecutive quarter of double digit growth in the domestic market and given multiple triggers, the street expects Nestle India to maintain its growth trend and outperform peers. 

Most of its key brands across categories such as Maggi, Kitkat, Nescafe and Milkmaid reported double digit growth aided by in-home consumption. E-commerce sales, which account for just under 4 per cent of sales reported a growth of 66 per cent y-o-y and this trend is expected to continue. In the near term, Covid-related restrictions could lead to improvement in volumes due to stocking of key brands. 

Emkay’s Ashit Desai believes that domestic growth has been steady and seems ahead of peers with a two year average growth of 10 per cent led by strong in-home consumption trends.  Lockdowns may impact near-term growth, but Nestle’s categories are likely to be resilient, offering better growth as compared to  peers, he adds. 

Growth in the medium to long term is expected to be driven by the company’s moves to expand its rural reach, and launch new products. The company had highlighted plans to expand its rural coverage by a third with rural centric products. 

Analysts at Prabhudas Lilladher believe that this will result in strong long term growth given rural and semi-urban markets are growing at 2-2.5 times that of urban areas. The move should also help the company expand its rural share in revenues from the current 25 per cent which is the lowest among peers. While the pace of new launches has been lower in CY20 than earlier given the focus on core products amidst the pandemic, the company has a pipeline of 40-50 new products which should ensure that pace of launches remain healthy. 

While the company reported expansion of gross margins by 220 basis points in the March quarter due to lower prices of milk, wheat and sugar, the gains at the operating profit level were limited to 150 basis points due to higher advertising costs. Though the management highlighted commodity pressures going ahead (palm oil, packing material), analysts believe that product inflation in key inputs may be passed on by the company through hikes.

While most brokerages are bullish about the company’s growth trajectory led by expansion and new launches, the stock at current levels is trading at around 60 times its CY22 earnings estimates and is fairly valued. Investors have to await a better entry opportunity to benefit from growth over the long term.