Analyst Meet Update

25 AUG 2016

NESTLE INDIA

SELL

FMCG

Target Price: Rs 6,000

Getting its act together; valuations rich

Nestle India is eyeing volume-driven double digit topline growth in the
medium term led by increasing penetration and higher frequency (aided
by innovation and renovations across portfolio). Innovation is largely
focused on uptrading the consumer and new category incubation.
ItsH1CY16 analyst meet emphasized on new product launches and
recovery in Maggi sales as the key focus areas. In the last three months,
Nestlewas able to launch 25 new products due to significant ramp-up in
operational parameters.
The companys aggression on topline growth has generated excitement
but new launches are niche in nature and would be a dragon earnings
even in medium term. The stock trades at CY19 P/E of 33x onour
somewhat optimistic earnings. Maintain SELL with TP of Rs 6,000
(36x 1-year forward PE).

CMP
Potential Upside

: Rs 6,825
: -12%

MARKET DATA
No. of Shares
Free Float
Market Cap
52-week High / Low
Avg. Daily vol. (6mth)
Bloomberg Code
Promoters Holding
FII / DII

: 96 mn
: 37%
: Rs 658 bn
: Rs 7,390 / Rs 4,990
: 45,219 shares
: NEST IB Equity
: 63%
: 0% / 6%

Way forward: Nestle aims to achieve its growth objective through (a) penetration and frequency, (b) consumer-focused
innovation and renovation, and (c) capturing potential of many Indias within India. Seven identified trends influencing
the companys way forward are(i) increasing urbanization, (ii) technology tide (~345 mn population is tech enabled),
(iii) increasing women power (decision making on the rise), (iv) premiumization, (v) valorizing value, (vi) quest for
goodness and (vii) balance between taste, indulgence and health.
Our view: Nestle delivered 18% EPS CAGR over CY01-11 led by 15% sales growth and margin gains. In the past five
years, volume growth slowed down with sales and EPS CAGR of 5% and 4% over CY11-16E (despite full Maggi sales
in CY16). We believe Nestle might deliver on growth expectations (~15% growth) over CY16-18E but it would be
mainly achieved due to lower base. It would be difficult to sustain this rate as baby food category(high contribution to
sales) is growing at a slower pace.

Financial summary (Standalone)

Key drivers

Y/E December

CY15

CY16E

CY17E

Sales (Rs mn)

81,233

96,361

110,678

126,714

9,800

12,223

14,189

16,695

123.3

148.5

170.5

EPS (Rs)

101.6

126.8

147.2

173.2

Change YOY (%)

(20.1)

24.7

16.1

17.7

P/E (x)

67.1

53.8

46.4

39.4

Price performance

RoE (%)

34.7

41.0

42.7

45.3

140

RoCE (%)

46.6

58.2

60.1

63.1

120

EV/E (x)

38.6

30.9

26.7

23.2

100

DPS (Rs)

48.5

75.0

90.0

110.0

80

Adj PAT (Rs mn)

Con. EPS* (Rs)

Source: *Consensus broker estimates, Company, Axis Capital

CY18E

(%)

CY15E

CY16E

CY17E

(17.8)

20.2

15.5

(1.3)

0.8

7.8

Gross margin

57.3

57.5

57.2

EBITDA margin

20.3

21.3

21.3

Domestic Revenue
Growth
Exports Growth

Sensex

Nestle India

60
Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

01

Analyst Meet Update

25 AUG 2016

NESTLE INDIA
FMCG

Analyst meet takeaways

Maggi gaining back share, though category is still 2/3rd of pre-controversy levels
In 2014, when noodles market was sized at ~Rs33bn, Maggi sales were
~Rs26bn with ~80% market share. Post Maggi re-launch in Nov-15, Nestle was
quick to regain 57% market share in the Rs22bn noodle category. Management
expects category recovery(to 2014 level) to be gradual, as noodle consumption is
still an area of concern for some consumers (especially Mothers, who have migrated
to other food options). Management observations on Maggi re-launch:

Rebound and reloaded While there was concern over revival of noodles
category due to Maggi controversy (from Jun-15 to Nov-15), Nestle India has
not lost any distributor, saw no industrial disputes and no supplier left

Accelerate to market - Maggi controversy helped Nestle significantly revamp its

operations. It has able to reduce the lead time considerably like packing
material procurement days reduced to 9(normal 42), raw material to 5 days
(from 21 days), system readiness to 5 days (from 21 days), campaign to
20 days(from 45 days)

GalvanizingtroopsMaggi is now present in ~900 towns across India. Total

outlet reach is ~2.4 mn (vs. 3.8 mn in 2014). Management highlighted that
while it has completely recovered supplies to urban market, there is still short
supply in rural markets.

170

171

44%

148
136

129

131

54% 56%

57%

35%

138

100

Source: Company, Axis Capital Note: Sales indexed to Nov-15 (100)

Apr-16

Mar-16

Feb-16

Jan-16

Dec-15

Nov-15

Jun-16

May-16

Apr-16

Mar-16

Feb-16

Jan-16

11%

Dec-15

Nov-15

48%

51%

Jun-16

Exhibit 2: Maggi market share in noodles (post controversy)

May-16

Exhibit 1: Maggi sales (post controversy)

Source: Company, Axis Capital

02

25 AUG 2016

Analyst Meet Update

NESTLE INDIA
FMCG

Way forward for the company

What is the new reality: Management is hopeful that urbanization can help
urban-biased companies. It highlighted sevenimportant trends for Nestle:

Urbanization:is at an all-time high, with ~51% increase in cities in India

Technology tide: ~345 mn population tech-enabled, hence digital has high

influence on consumers

Women worth improving: Buying decisions by women today account for

90%of Nestle Indiassales (of house product categories)

Propensity to premiumize:
premium products

Valorizing value: Indian consumer is looking for value-add and price is not
the only criteria for buying decisions

Quest for goodness: Huge opportunities exist in health and nutrition space.
Nestle Health Science business has strong prospects. Eg. ~63 mn peoplein
India arediabetic and the number has been rising through the years

Shifting the sweet spot: There is a need to balance Taste, Indulgence

and Health

Overall

market

is

moving

towards

Where does Nestle want to go: Company vision is to remain a leading and
trusted health and wellness company.Of the 1.28bn (in 2015) Indian
population, Nestle India is targeting urban-centric 315 mn population.
Management highlighted its key ambitions and growth drivers:

Consumer-led growth: (a) focusing on volume-led double digit growth,

(b) launchof new products in each category, and (c) consumer
insight-led growth

Winning edge: (a) fast, focused and flexible in thought and action,
(b) embrace powerful way of working and(c) enable, empower, engage,
and energize colleagues

Simplification of processes: (a) process reduction of 30-40%, (b) reduction

in meetings by 50% and(c) zero tolerance for non-compliance

Howwill the company get there: Management emphasized goals to be

achieved through:

Driving penetration and frequency:Management highlighted that ~50% of

growth in the next couple of years will come from penetration improvement
and increased frequency of usage. Penetration in some of the categories
are still relatively low

Consumer-centric innovations and renovations across categories:

Five criteria for innovation highlighted by management are (a) consumer
insight around nutrition, health and wellness (differentiated offering;Eg: it
has launched a+ PRO-GROWTH as protein intake is less among kids),
(b) value up and premiumize (more initiatives in this space), (c) size of
opportunity and companys competency, (d) sustainability and innovation
of an accretive nature (should be a building block for something else as
well) and(e) building capabilities to expand in new categories (Noodles in
the past and currently with Nestle Ceregrow for 3-5year old kids)

03

25 AUG 2016

Analyst Meet Update

NESTLE INDIA
FMCG

Capture potential of many Indias within India: (a) Calibrated launches

based on geography, brand, category and channel potential, (b) Resources
to be placed behind national and regional winners and (c) Organization
capabilities to be fast, focused and flexible helping to excel in execution.
Launch and assessment time reduced from couple of months to couple
of weeks

25 new product launches in last three months

Prepared dishes and cooking aidsThe company has expanded the Maggi
franchise with new launches like (a) Maggi Cuppanoodles (4 variants),
(b) Maggi Hot Heads (4 variants) and (c) Maggi no garlic and no onion. It is
focusing to uptradethrough these launches. Response has been good so far

Chocolate and confectioneryIts new launches in the segment include NESTLE

BARONE charge, NESTLE Munch nuts, gift packs and premium chocolates

Milk products and Nutrition New launches in the segment includeNESTLE a+

GREKYO (4 variants, launched only in five to six states), NESTLE a+
PRO- GROWTH, NESTLE EVERYDAY masala fusion (tastes better than
homemade masala tea, as per management) and NESTLE CEREGROW (entry
into 3-5 year kids segment;in-between food with nutrition)

Beverages New launches include NESCAF SUNRISE Insta-Filter, NESCAF 3in-1, NESCAF RTD 3 variants, NESTEA 3 variants

Nestle categories more impacted in a slowing FMCG market

FMCG category (including infant formula and infant cereal segments) sized at
~US$ 40 bn (as per AC Nielson) has grown ~5.8% in H1CY16, with ~7.2%
growth in Q1 and ~4.4% in Q2. Of this, Foods and Beverage category sized at
US$ 21 bn has grown 6.3% in H1CY16. Nestle specific category sized at
US$ 4 bn has been highly impacted from slowdown (1.2% growth in H1CY16, Q1
1.3% and Q2 1%).

Exhibit 3: Category-wise market share and leadership position

Source: Company, Axis Capital

04

Analyst Meet Update

25 AUG 2016

NESTLE INDIA
FMCG

H1FY16 performance review

Nestle Indias H1CY16 domestic sales volume grew 7.3% YoY to 172,000 tons.
Volume growth adjusted for Noodles, Surplus fat & product portfolio optimization
initiatives was 0.5%. Reported domestic sales value growth was 2.6%, while
comparable growth was -0.7%.
Raw material indexed bottomed out
The company has benefitedfrom benign raw material prices during the last
18 months. However, management indicated inflation in some of the food raw
materialswould move index up in coming quarters. Inflationary trend seen for key
raw materials like Sugar (up 40%), Palm oil (14%), and Wheat flour (14%).

Exhibit 4: Nestl Indias Commodity Price Index

122

125
120

115

112

115

114

107

110
105

100

100
95

1HCY16

2015

2014

2013

2011

2012

90

Source: Company, Axis Capital Note: Indexed with base year 2011

Exhibit 5: Milk fat price trends

Exhibit 6: Palm oil price trends

150

160

Index - Q1 CY10 = 100

170
150

140

140

130

130

120

120

110

110

100

100

Source: Company, Axis CapitalNote: Indexed 1QCY10=100

Current

Q1CY16

Q3CY15

Q1CY15

Q3CY14

Q1CY14

Q3CY13

Q1CY13

Q3CY12

Q1CY12

Q3CY11

Q1CY11

90
Q3CY10

Current

Q1CY16

Q3CY15

Q1CY15

Q3CY14

Q1CY14

Q3CY13

Q1CY13

Q3CY12

Q1CY12

Q3CY11

Q1CY11

Q3CY10

Q1CY10

90

Q1CY10

Index - Q1 CY10 = 100

160

Source: Company, Axis CapitalNote: Indexed 1QCY10=100

05

Analyst Meet Update

25 AUG 2016

NESTLE INDIA
FMCG

Exhibit 7: Sugar price trends

Exhibit 8: Wheat flour price trends

140

90

Q1CY16

Current
Current

Q3CY15

Q1CY15

Q3CY14

Q1CY14

Q3CY13

Q1CY13

Q3CY12

Q1CY12

80

Q1CY16

Source: Company, Axis CapitalNote: Indexed 1QCY10=100

Source: Company, Axis CapitalNote: Indexed 1QCY10=100

Exhibit 9: Skimmed milk price trends

Exhibit 10: Green coffee price trends

200

200

180

Index - Q1 CY10 = 100

220

180

160

160

140

140

120

120

100

Source: Company, Axis CapitalNote: Indexed 1QCY10=100

Q3CY15

Q1CY15

Q3CY14

Q1CY14

Q3CY13

Q1CY13

Q3CY12

Q1CY12

Q3CY11

Q1CY11

80
Q3CY10

Current

Q1CY16

Q3CY15

Q1CY15

Q3CY14

Q1CY14

Q3CY13

Q1CY13

Q3CY12

Q1CY12

Q3CY11

Q1CY11

Q3CY10

80

Q1CY10

100

Q1CY10

Index - Q1 CY10 = 100

100

Current

Q1CY16

Q3CY15

Q1CY15

Q3CY14

Q1CY14

Q3CY13

Q1CY13

Q3CY12

Q1CY12

Q3CY11

Q1CY11

Q3CY10

Q1CY10

70

110

Q3CY11

80

120

Q1CY11

90

130

Q3CY10

100

Q1CY10

Index - Q1 CY10 = 100

Index - Q1 CY10 = 100

110

Source: Company, Axis CapitalNote: Indexed 1QCY10=100

24X7 consumer engagement services

The company has significantly improved consumer engagement program along with
Maggi re-launch. It now has 24X7 consumer engagement services across channels
in India. Number of contactsrose to 450,000 from 2,500 in 2012. Call response
time has significantly reduced to 30 minutes nowfrom 24 hours in 2012.
Other highlights

Effective tax rate for H1CY16 increased 550 bps YoY to 36%(vs. 30.5% in
H1CY15). Management highlighted that lower tax rate in H1CY15 was due to
(a) investment allowance received was for couple of years and (b) profit from
tax holiday period was high. Management highlighted that tax benefit from
Pantnagar facility has been phased out effective 1st Apr 2016

With no capacity expansion plans, management expects only maintenance

capex in CY16. Utilization is 50-60% for current Maggi capacity

06

25 AUG 2016

Analyst Meet Update

NESTLE INDIA
FMCG

Exhibit 11: 1-year forward PE (on consensus EPS)

PE (x)

60

10 yr median

50
40

30
20
Aug-16

Aug-15

Aug-14

Aug-13

Aug-12

Aug-11

Aug-10

Aug-09

Aug-08

Aug-07

Aug-06

10

Source: Bloomberg, Axis Capital

07

Analyst Meet Update

25 AUG 2016

NESTLE INDIA
FMCG

Financial summary (Standalone)

Profit &loss (Rs mn)

Y/E December
Net sales
Other operating income
Total operating income
Cost of goods sold
Gross profit

Gross margin (%)

Total operating expenses
EBITDA

EBITDA margin (%)

Cash flow (Rs mn)

CY15

CY16E

CY17E

CY18E

Y/E December

CY15

CY16E

CY17E

CY18E

81,233

96,361

110,678

126,714

Profit before tax

14,155

18,380

21,021

24,361

520

617

682

754

Depreciation & Amortisation

(3,473)

(3,627)

(4,099)

(4,508)

81,753

96,978

111,360

127,468

Chg in working capital

(34,689)

(40,954)

(47,339)

(54,487)

Cash flow from operations

47,064

56,025

64,021

72,981

57.9

58.1

57.8

57.6

(30,504)

(35,347)

(40,270)

(45,711)

16,560

20,678

23,751

27,271

20.4

21.5

21.5

21.5

Capital expenditure
Cash flow from investing

Equity raised/ (repaid)

Debt raised/ (repaid)

1,665

1,797

18,795

21,606

(944)

(5,692)

(6,000)

(6,250)

(4,974)

(1,075)

(6,631)

(6,652)

(18)

(177)

(8,533)

(10,239)

(12,515)

(12,362)

(9,310)

(10,889)

(13,165)

532

4,515

1,275

1,789

CY15

CY16E

CY17E

CY18E

101.6

126.8

147.2

173.2

CEPS (Rs)

94.4

160.3

185.1

215.3

48.5

75.0

90.0

110.0

83.0

61.2

63.1

65.3

(3,473)

(3,627)

(4,099)

(4,508)

Cash flow from financing

EBIT

13,087

17,051

19,652

22,763

Net chg in cash

(33)

(39)

Other income

216
14,899

(5,633)

Dividend paid

Depreciation
Net interest

3,445
17,868

Key ratios

1,101

1,368

1,369

1,598

Profit before tax

14,155

18,380

21,021

24,361

Y/E December

Total taxation

(4,356)

(6,157)

(6,832)

(7,666)

OPERATIONAL

Tax rate (%)

30.8

33.5

32.5

31.5

Profit after tax

9,800

12,223

14,189

16,695

FDEPS (Rs)

Minorities

DPS (Rs)

Profit/ Loss associate co(s)

Dividend payout ratio (%)

9,800

12,223

14,189

16,695

12.1

12.7

12.8

13.2

Net sales (%)

(17.2)

18.6

14.9

14.5

(4,167)

(399)

(439)

(445)

EBITDA (%)

(21.2)

24.9

14.9

14.8

Adj net profit (%)

(20.1)

24.7

16.1

17.7

FDEPS (%)

(20.1)

24.7

16.1

17.7

RoE (%)

34.7

41.0

42.7

45.3

RoCE (%)

46.6

58.2

60.1

63.1

6.2

8.8

9.2

10.5

Adjusted net profit

Adj. PAT margin (%)

Net non-recurring items
Reported net profit

5,633

11,824

13,750

16,249

Balance sheet (Rs mn)

Y/E December
Paid-up capital

GROWTH

PERFORMANCE

CY15

CY16E

CY17E

CY18E

964

964

964

964

Reserves & surplus

27,214

30,505

34,017

37,751

EFFICIENCY

Net worth

28,178

31,470

34,981

38,715

Asset turnover (x)

Borrowing

177

1,729

1,729

1,729

1,729

Total liabilities

60,804

65,383

72,335

79,918

Receivable days

3.5

4.0

3.6

3.6

Gross fixed assets

51,174

56,674

62,674

68,924

Inventory days

46.0

42.0

43.3

43.4

Less: Depreciation

(22,195)

(25,822)

(29,921)

(34,429)

Payable days

41.6

30.1

30.3

30.5

28,979

30,851

32,753

34,495

2,308

2,500

2,500

2,500

Total fixed assets

31,286

33,351

35,253

36,995

Net debt/ equity (x)

(0.6)

(0.7)

(0.7)

(0.7)

Total Investment

13,249

10,000

12,000

14,000

Current ratio (x)

0.5

0.7

0.7

0.7

8,208

8,773

10,402

11,909

Interest cover (x)

397.8

437.2

784

1,069

1,103

1,263

4,995

9,557

10,832

12,621

PE (x)

67.1

53.8

46.4

39.4

EV/ EBITDA (x)

38.6

30.9

26.7

23.2

7.9

6.6

5.7

5.0

23.4

20.9

18.8

17.0

Dividend yield (%)

0.7

1.1

1.3

1.6

Free cash flow yield (%)

2.6

1.4

1.9

2.3

Other non-current liabilities

Net fixed assets

Add: Capital WIP

Inventory
Debtors
Cash & bank
Loans & advances

2,134

2,533

2,646

3,030

Current liabilities

30,719

32,184

35,625

39,473

Net current assets

(14,451)

(10,153)

(10,543)

(10,550)

Other non-current assets

Total assets
Source: Company, Axis Capital

60,804

65,383

72,335

79,918

Sales/ total assets (x)

Working capital/ sales (x)

1.4

1.5

1.6

1.7

(0.2)

(0.2)

(0.2)

(0.2)

FINANCIAL STABILITY
Total debt/ equity (x)

VALUATION

EV/ Net sales (x)

PB (x)

Source: Company, Axis Capital

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25 AUG 2016

Analyst Meet Update

NESTLE INDIA
FMCG

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09

25 AUG 2016

Analyst Meet Update

NESTLE INDIA
FMCG

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This report may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this report should make such
investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report
(including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. Certain transactions,
including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are not suitable for
all investors. ASL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to
the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the
currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Past performance is not necessarily a guide to future performance.
Investors are advise necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated
before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not
predictions and may be subject to change without notice.

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company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. Each of
these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting this document.
ASL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the
recipients of this report should be aware that ASL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of
Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ASL may have issued other reports
that are inconsistent with and reach different conclusion from the information presented in this report.

Neither this report nor any copy of it may be taken or transmitted into the United State (to U.S. Persons), Canada, or Japan or distributed, directly or
indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. If this report is inadvertently sent or has
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requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of
investors.

The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as
endorsement of the views expressed in the report. The Company reserves the right to make modifications and alternations to this document as may be
required from time to time without any prior notice. The views expressed are those of the analyst(s) and the Company may or may not subscribe to all the
views expressed therein.
Copyright in this document vests with Axis Securities Limited.
Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No.
18002100808/022-61480808, Regd. off.- Axis House, 8th Floor, Wadia International Centre, PandurangBudhkarMarg, Worli, Mumbai 400 025. Compliance
Officer: AnandShaha, Email: compliance.officer@axisdirect.in, Tel No: 022-42671582.

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