Nestle India - Annual Report Update (Building Blocks in Place For Healthy Growth) - MOSt

21 March 2022
Annual Report Update | Sector: Consumer
Nestle India
BSE SENSEX S&P CNX
57,292 17,118 CMP: INR17,860 TP: INR18,700 (+5%) Neutral
Building blocks in place for healthy growth
The decline in ad spends-to-sales ratio is concerning given the elevated
commodity cost ahead
NEST’s CY21 annual report highlights its underlying strengths and one of the strongest
revenue growth opportunities in the Indian Consumer universe. The key takeaways are as
follows:
 Overall volume growth of ~11% in CY21 was healthy, with strong growth in
Beverages (up ~18% YoY) and Prepared Dishes and Cooking Aids (Maggi, up ~16%
YoY). Since Prepared Dishes constitute ~60% of total volumes v/s ~31% of sales,
overall volume growth is very healthy in years when this segment performs very well.
 Volumes in Milk and Nutrition (M&N, 43%/25% of total sales/volumes) fell 2.7% YoY
in CY21, clocking another disappointing year for NEST’s largest segment by sales. This
Stock Info continues the trend of flattish volumes in this segment in three out of the past four
Bloomberg NEST IN
years. While volume growth has been robust across the other three categories since
Equity Shares (m) 96
M.Cap.(INRb)/(USDb) 1721.9 / 22.6 Mr. Suresh Narayanan took charge, M&N volume in CY21 was marginally lower than
52-Week Range (INR) 20600 / 16116 CY14 levels.
1, 6, 12 Rel. Per (%) -1/-8/-6  Sales growth in the M&N segment in CY21 was subdued ~1.9%, taking some sheen
12M Avg Val (INR M) 1254 off the excellent performance in the other three segments, all of which clocked an
Free float (%) 37.2
impressive sales growth (between 15% and 21% YoY) in CY21.
 Ad spends (not shared in interim results) were flat YoY. As a percentage of sales, it
Financials Snapshot (INR b)
Y/E Dec 2021 2022E 2023E
was at the second lowest level in the last seven years. Given the higher investments
Sales 147.1 167.0 188.7 in ad spends in the past years, which contributed to double-digit revenue growth in
Sales Gr. (%) 10.2 13.5 13.0 recent years, the decline in ad spends-to-sales ratio is disappointing. With rising
EBITDA 35.7 38.8 44.4 commodity costs (which the management believes is here to stay), the ad spends-to-
Margins (%) 24.3 23.2 23.5 sales ratio needs to be monitored over the next couple of years.
Adj. PAT 23.2 25.1 28.9
 Amid the COVID-19 pandemic, the pace of launches, while lower than preceding years
Adj. EPS (INR) 240.8 260.0 299.9
EPS Gr. (%) 10.8 8.0 15.4
due to the management’s focus on the core business, was still healthy compared to its
BV/Sh.(INR) 216.2 226.2 226.1 peers. Since CY16, NEST has launched 90 products.
Ratios  FATR was impacted by ongoing capex and increase in ROU assets, but net working capital
RoE (%) 113.2 117.5 132.6 days remained under control. Gross FATR (including ROU) fell to 2.9x in CY21 from 3.2x in
RoCE (%) 109.5 111.0 125.2 CY19, while gross FATR (excluding ROU) fell to 3.2x from 3.5x. NWC days was flat to
Payout (%) 83.0 96.2 100.0
marginally negative in the last four years from eight-to-fifteen days earlier.
Valuations
 Valuations are expensive at 59.5x CY23E EPS, preventing us from turning constructive
P/E (x) 74.2 68.7 59.5
P/BV (x) 82.6 79.0 79.0 on the stock. We maintain our Neutral rating.
EV/EBITDA (x) 47.5 43.5 38.0
Div. Yield (%) 1.1 1.4 1.7
Strong volume and sales growth led by non M&N segments
 NEST reported healthy (~11%) volume growth in CY21, with sales growth of
Shareholding pattern (%) 10.2%. Segment-wise details are not shared in its quarterly result and were a
As On Dec-21 Sep-21 Dec-20 mixed bag, with double-digit volume growth in Beverages (up 18% on the back
Promoter 62.8 62.8 62.8 of a 21% decline in CY20), Prepared Dishes (up 16% on a 7% base), and
DII 7.9 8.0 7.8
FII 12.4 12.3 12.8
Chocolates and Confectionary (up ~11% on ~3% base). Sales growth was even
Others 17.0 16.9 16.7 better with all these categories (which together constitute 57% of overall sales)
FII Includes depository receipts growing between 15% and 21%.
 M&N (the largest segment at 43% of sales and 25% of volume) continued to
disappoint with a decline of ~3% in volume and flattish (1.9%) sales growth.
Krishnan Sambamoorthy – Research Analyst (Krishnan.Sambamoorthy@MotilalOswal.com)

Research Analyst: Dhairya Dhruv (Dhairya.Dhruv@MotilalOswal.com) / Kaiwan Jal Olia (kaiwan.o@motilaloswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Nestle India
Stock performance (one-year)  Even though Prepared Dishes contribute only 31% to sales, it constitutes 60% of
volumes. NEST needs to maintain its mid-teen momentum on a 16.4% base if
M&N continues to underperform. M&N volumes have continued to decline over
the past 10 years after seeing some revival in CY18 and CY19.
 While the management did not attribute any reasons for the decline in its
annual report, it did mention increased competitive intensity in the segment,
especially in the milk sub-segment of M&N.
Ad spends-to-sales ratio to see a notable decline

 As a percentage of domestic/net sales, A&P expense fell 60bp/50bp YoY to
5.5%/5.2%. This has been the fourth consecutive year of decline in ad spends-to-
sales ratio.
 The latter was the second lowest in the last seven years in CY21.
 While the COVID-19 pandemic in CY20 led to a 70bp decline in ad spends-to-
sales ratio, we were not expecting a further decline in CY21.
 With incremental pressures on gross margin, there is a risk that either EBITDA
margin may be under incremental pressure or the ad spends-to-sales ratio can
decline further in CY22.
Launches and digitalization

 One of the most interesting aspects of NEST in recent years is the pick-up in the
pace of launches.
 The company has seen a healthier launch pipeline since CY16 as compared to
the past. While launches slowed down in CY17-18 v/s CY16 levels, CY19-21 saw a
much more robust show.
 NEST has launched over 90 products since CY16, with 20 projects in the pipeline.
 Digitalization is a growth accelerator and will continue to be so in the future.
Leveraging the power of data and analytics is part of its business strategy. It has
a multi-intelligent data analytics system that sources internal and external data
to converge insights that trigger swift and decisive business actions.
Channel expansion
 NEST set out on its RURBAN strategy by: 1) using a healthy mix of customized
portfolios, 2) direct distribution, 3) enhancing its distribution infrastructure, 4)
deployment of resources, 5) regional and localized communication, 6) enhancing
its visibility by participating in village haats, and 7) building a consumer connect.
 Through Project RURBAN, it reached out to small towns with a population of less
than 100,000 and large villages with a population greater than 2,000 with an eye
on long-term growth opportunities.
Sustainability and efficiency

 From CY06 to CY21, it reduced the usage of energy/water/wastewater
generation/specific direct GHG emissions by ~ 43%/~52%/~67%/57% for every
tonne of production.
 Renewable energy: Key renewable energy projects contributed to GHG savings.
This was implemented through higher purchase of solar power for the Choladi
and Nanjangud factories and replacement of fossil fuel with clean fuel for steam
generation at the Bicholim factory.
21 March 2022 2
Nestle India
 EPR (Extended Producer Responsibility) Initiative: NEST has engaged with

various waste agencies for end-to-end management of plastic waste. In CY21, it
achieved an EPR of 23,600MT through plastic waste management.
Valuation and view

 There is no material change to our CY22 and CY23 EPS forecasts.
 The long-term narratives for revenue and earnings growth are highly attractive.
The Packaged Foods segment in India offers immense growth opportunities. This
is particularly true for a company such as NEST, which has a strong pedigree and
distribution strength. The successful implementation of its volume-led growth
strategy in recent years provides confidence in execution as well.
 Valuations at 59.5x CY23E P/E are, however, expensive and do not offer any
significant upside from a one-year perspective. We value the company at 60x
Mar’24E EPS to arrive at our TP of INR18,700. We maintain our Neutral stance.
21 March 2022 3
Nestle India
Exhibit 1: NEST’s segment-wise performance

CY12 CY13 CY14 CY15 CY16* CY17 CY18 CY19 CY20 CY21
Volume (MT)
Milk products 140,386 138,772 135,591 131,980 128,751 130,796 137,066 138,941 138,402 1,34,669
Beverages 25,353 27,717 24,673 22,130 22,092 24,423 27,013 26,380 20,772 24,507
Prepared Dishes and Cooking Aids 236,554 245,443 254,553 103,138 176,871 210,427 240,879 264,072 281,392 3,27,659
Chocolate and Confectionery 47,745 46,718 41,080 33,083 35,289 36,803 42,197 49,033 50,358 55,648
Total 450,038 458,650 455,897 290,331 363,003 402,449 447,155 478,426 490,924 5,42,483
Volume (as a percentage of total, %)
Milk products (MT) 31 30 30 45 35 33 31 29 28 25
Beverages (MT) 6 6 5 8 6 6 6 6 4 5
Prepared Dishes and Cooking Aids (MT) 53 54 56 36 49 52 54 55 57 60
Chocolate and Confectionery 11 10 9 11 10 9 9 10 10 10
Total 100 100 100 100 100 100 100 100 100 100
Volume growth (%)
Milk products -5.1 -1.1 -2.3 -2.7 -2.4 1.6 4.8 1.4 -0.4 -2.7
Beverages -5.0 9.3 -11.0 -10.3 -0.2 10.6 10.6 -2.3 -21.3 18.0
Prepared Dishes and Cooking Aids 8.0 3.8 3.7 -59.5 71.5 19.0 14.5 9.6 6.6 16.4
Chocolate and Confectionery -9.4 -2.2 -12.1 -19.5 6.7 4.3 14.7 16.2 2.7 10.5
Total 0.8 1.9 -0.6 -36.3 25.0 10.9 11.1 7.0 2.6 10.5
Weighted average volume growth 1.3 2.0 -0.3 -25.3 34.6 11.5 11.3 7.2 3.0 11.2
Price (INR/kg)
Milk products 275 293 337 354 360 368 378 407 444 465
Beverages 443 478 543 604 582 568 564 569 711 690
Prepared Dishes and Cooking Aids 103 110 116 127 131 129 129 132 139 139
Total 191 205 222 290 259 252 251 257 271 270
Price growth (%)
Milk products 21.4 6.7 15.0 4.9 1.8 2.4 2.7 7.5 9.2 4.8
Beverages 10.6 7.9 13.7 11.2 -3.6 -2.4 -0.7 1.0 24.8 -2.9
Prepared Dishes and Cooking Aids 4.4 7.0 5.8 9.5 2.8 -1.8 0.2 2.8 4.9 -0.1
Chocolate and Confectionery 17.3 12.4 10.8 10.1 -1.2 0.0 0.0 1.0 3.9 9.5
Total 10.9 7.2 8.6 30.7 -10.7 -2.8 -0.4 2.5 5.3 -0.4
Weighted average price growth 14.6 7.7 11.6 7.3 0.9 0.3 1.2 4.5 9.0 3.1
Gross sales (INR m)
Milk products 38,594 40,712 45,752 46,694 46,350 48,196 51,876 56,518 61,488 62,686
Beverages 11,227 13,241 13,398 13,360 12,861 13,870 15,226 15,018 14,763 16,918
Prepared Dishes and Cooking Aids 24,302 26,982 29,613 13,141 23,176 27,071 31,053 34,982 39,108 45,501
Chocolate and Confectionery 11,696 12,864 12,532 11,109 11,709 12,214 14,007 16,435 17,543 21,231
Total 85,819 93,799 101,295 84,304 94,096 101,351 112,162 122,953 1,32,902 1,46,337
Gross sales (as a percentage of total, %)
Milk products 45 43 45 55 49 48 46 46 46 43
Beverages 13 14 13 16 14 14 14 12 11 12
Prepared Dishes and Cooking Aids 28 29 29 16 25 27 28 28 29 31
Total 100 100 100 100 100 100 100 100 100 100
Gross sales growth (%)
Milk products 15.2 5.5 12.4 2.1 -0.7 4.0 7.6 8.9 8.8 1.9
Beverages 5.1 17.9 1.2 -0.3 -3.7 7.8 9.8 -1.4 -1.7 14.6
Prepared Dishes and Cooking Aids 12.8 11.0 9.7 -55.6 76.4 16.8 14.7 12.7 11.8 16.3
Chocolate and Confectionery 6.4 10.0 -2.6 -11.4 5.4 4.3 14.7 17.3 6.7 21.0
Total 11.8 9.3 8.0 -16.8 11.6 7.7 10.7 9.6 8.1 10.1
*Slight impact from the implementation of Goods & Services Tax (GST) on CY16 financials Source: Company, MOFSL
21 March 2022 4
Nestle India
Strong domestic volume growth in a tepid environment

 The focus on volume growth has been clear since Mr. Suresh Narayanan took
over the reins of NEST. Average realization fell to INR270/kg in CY21 from
INR290/kg in CY15 (Exhibit 1). CY21 saw flat realizations after a 5.3% increase in
CY20. There have been only two years of realization/pricing growth under Mr.
Narayanan’s six-year tenure so far. Prior to Mr. Narayanan’s appointment,
realization had risen rapidly to INR290/kg in CY15 from INR172/kg in CY11,
highlighting the disproportionate focus of the earlier management on pricing.
 Volume growth was in double-digits for all of NEST’s segments, barring Milk
Products which saw a decline of 2.7% in CY21.
 Net sales rose 10.2% YoY to INR147.1b in CY21.
 Domestic sales growth stood at 10.7% in CY21 — a noteworthy performance
given the decent high base in CY20 (which followed two years of double-digit
sales growth). This indicates a vast opportunity in the domestic Foods’ category
and NEST’s success in its own initiatives.
Exhibit 2: Net sales grew 10.2% YoY to INR147.1b in CY21

Net Sales (INR b) Net Sales growth (%)
10.9 11.8 12.8 10.2

9.2 8.3 9.5 9.5 7.9
(17.0)
83.3 91.0 98.5 81.8 91.4 100.1 112.9 123.7 133.5 147.1
CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21
Source: Company, MOFSL
Exhibit 3: Domestic sales grew 10.7% YoY to INR139.9b in CY21
Domestic (INR b) Domestic sales growth (%)

12.1 12.3 8.2 10.9 10.9 10.7
7.3 8.4 8.5
(17.8)
81.6 87.5 94.9 77.9 87.5 94.7 105.1 116.6 126.4 139.9
 Volumes plunged sharply in CY15 due to the Maggi crisis. Volume growth in
CY16 and CY17 may be attributed to the recovery from the trough of CY15 (the
company started emerging completely out of the crisis only in 2HCY16). NEST’s
10.5% volume growth in CY21 (despite a low base of 2.6% growth) was rather
commendable, especially in a constrained environment.
21 March 2022 5
Nestle India
Exhibit 4: Overall tonnage grew 10.5% in CY21… Exhibit 5: ...leading to gross sales growth of 10.1% YoY
Tonnage growth (%) 25.0 Price growth (%) Gross sales growth (%)
11.1 10.5
10.9 7.0
0.8 1.9 2.6 11.8 11.6 10.7
9.3 8.0 9.6 8.1 10.1
7.7
(0.6) 10.9 7.2 8.6 30.7 2.5 5.3
(10.7) (2.8) (0.4) (0.4)

(16.8)
(36.3)
CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21
Source: Company, MOFSL Source: Company, MOFSL
 Weighted average realization growth, which was inordinately high in the earlier
part of the last decade, was flattish during CY16-18. A weighted average
realization growth of 3.1% in CY21 was a return to the trend of flat to low
realization growth after the 9% growth in CY20 due to price hikes taken by NEST
to pass on significant inflation in raw materials, especially in dairy, as well as an
improvement in the mix. We believe that weighted average realization growth is
likely to be higher in CY22 as prices for most of NEST’s raw materials remain at
elevated levels.
Exhibit 6: Weighted average realization growth up 3.1% in CY21

Weighted average realization growth (%)
14.6
11.6
7.7 7.3 9.0
4.5 3.1
0.9 0.3 1.2
 Exports declined by 1.2% to INR6.4b in CY21 due to lower coffee exports and
mix deterioration. As a proportion of gross sales, exports fell 50bp YoY to 4.4%
in CY21.
 In the UK, Canada, Australia, and New Zealand markets, sale of MAGGI noodles
and sauces grew, while sales of Everyday dairy whitener declined in Nepal and
Bhutan due to COVID-related supply-chain disruptions.
 NEST launched Polo in the Middle East and Crunch Wafers in ASEAN markets
such as Indonesia and the Philippines.
 To bolster exports, NEST initiatives included: a) developing new markets such as
Indonesia and Mauritius, b) channel expansion in Australia and New Zealand,
and c) launch of range extensions like MAGGI Sauces to Oceania.
 NEST is exploring new markets in the Middle East for categories such as
Prepared Dishes and Cooking Aids, Chocolates, and Confectionery.
21 March 2022 6
Nestle India
Exhibit 7: Domestic sales grew 10.7% YoY in CY21 Exhibit 8: Exports fell 1.2% YoY in CY21
Domestic sales growth (%) 47.1 Exports sales growth (%)
12.1 12.3 10.9 10.9 10.7

7.3 8.4 8.2 8.5
7.6 6.9
2.9 3.3 0.9 1.4
(1.3) (1.2)
(17.8) (9.9)
Exhibit 9: Volume mix Exhibit 10: Sales mix

Milk Products/ Nutrition Beverages Milk Products/ Nutrition Beverages
Prepared Dishes Chocolate & Conf. Prepared Dishes Chocolate & Conf.
10.6 10.2 9.0 11.4 9.7 9.1 9.4 10.2 10.3 10.3 13.6 13.7 12.4 13.2 12.4 12.1 12.5 13.4 13.2 14.5
15.6 24.6 26.7
35.5 28.3 28.8 29.2 27.7 28.5 29.4 31.1
52.6 53.5 55.8 48.7 52.3 53.9 55.2 15.8
57.3 60.4
13.7 13.7 13.6 12.2 11.1
7.6 13.1 14.1 13.2 11.6
5.6 6.1 6.1
6.0 5.4 6.0
5.5 4.2
45.5 4.5 55.4 49.3 47.6 46.3
35.5 32.5 30.7 29.0 28.2 45.0 43.4 45.2 46.0 46.3 42.8
31.2 30.3 29.7 24.8
Prepared Dishes and Cooking Aids (60.4%/31.1% of CY21 volume/sales)

 In CY21, continued consumer demand for convenience and improved availability
helped MAGGI Noodles and MAGGI Masala-ae-Magic achieve double-digit
growth. MAGGI Sauces continued to grow profitably by focusing on
premiumization.
 It also launched MAGGI Veggie Masala Noodles and MAGGI Special Chicken65
Masala Noodles. With a rise in snacking among consumers, NEST launched two
new variants of MAGGI Hot n Sweet Sauce: ‘Sriracha’ and ‘Extra Hot’.
 From a sustainability perspective, the management, as part of the MAGGI Spice
plan sources seven spices from 39 Indian villages. It continued to partner with
farmers and suppliers and adopted sustainable agricultural practices focusing on
soil health, water usage, and biodiversity enhancement, while at the same time
staying committed to resilient livelihood and farm profitability.
 Breakfast Cereals: NEST launched Nestlé GOLD Corn and Oat flakes, which is a
differentiated proposition in the Cereals category. KOKO KRUNCH was
renovated with improved taste and an increase in whole grains. It also launched
KOKO KRUNCH Kookie cereal further strengthening its Kids Cereal portfolio. The
e-commerce channel helped deliver growth for the Breakfast Cereals business,
while single-serve SKUs drove penetration among consumers.
21 March 2022 7
Nestle India
Exhibit 11: Prepared Dishes – Volume/price growth Exhibit 12: Sales of Prepared Dishes grew 16.3% to INR45.5b
Volume Growth (%) Price Growth (%) Prepared dishes sales (INR b) Sales Growth (%)
71.5 76.4
9.5 (1.8) 0.2 (0.1) 16.8 14.7 12.7 11.8 16.3

4.4 7.0 5.8 2.8 4.9 12.8 11.0 9.7
2.8
8.0 19.0 14.5 9.6 6.6 16.4 (55.6)
3.8 3.7
24.3 27.0 29.6 13.1 23.2 27.1 31.1 35.0 39.1 45.5
(59.5)
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
Exhibit 13: Tonnage growth in the non-Maggi portfolio remains tepid in CY21
Maggi Tonnage growth (%) Non-Maggi Tonnage growth (%)

71.5
19.0 14.5 16.4

8.0 3.8 3.7 9.6 6.6
(0.1) (7.0) (0.6) 3.2 7.4 3.9 2.5

(6.1) (5.6) (2.2)
(59.5)
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
Milk and Nutrition (24.8%/42.8% of CY21 volume/sales)

 With consumers spending more time at home and adopting creative pursuits
such as baking and experimenting with new recipes, MILKMAID raised its
engagement via its digital platform – milkmaid.in – by providing dessert recipe
solutions for baking enthusiasts. Over 300,000 consumers visited the website
every month, which increased in-home usage of MILKMAID and fueled growth.
 The Ready-to-Drink beverage portfolio of NESCAFÉ and MILO saw good growth
as a result of the increase in home consumption and distribution that mitigated
the impact of declining out-of-home consumption.
Exhibit 14: Milk and Nutrition – Volume/price growth Exhibit 15: Milk and Nutrition sales grew 1.9% to INR62.7b
Volume Growth (%) Price Growth (%) Milk and Nutrition sales (INR b) Growth (%)
21.4 15.2
15.0 12.4
9.2 8.9 8.8
7.5 7.6
6.7 5.5
4.9 4.8 4.0
1.8 2.4 2.7
2.1 1.9
4.8 (0.7)
1.6 1.4
(1.1) (2.3) (2.7) (2.4) (0.4) 38.6 40.7 45.8 46.7 46.3 48.2 51.9 56.5 61.5 62.7
(5.1) (2.7)
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
21 March 2022 8
Nestle India
Beverages (4.5%/11.6% of CY21 volume/sales)

 NESCAFÉ registered double-digit volume-led growth, led by significant growth in
household penetration and higher market share.
 NEST continued its thrust on innovation with the launch of NESCAFÉ ALL in 1 (a
convenient coffee premix affordably priced at INR10), NESCAFÉ Black Roast, and
accelerating premiumization.
 NESCAFÉ Gold was revamped along with its packaging, which resulted in strong
brand growth.
 As a part of its cluster-based strategy, NEST aims to deliver a differentiated
brand in South India, with the launch of a renovated recipe for NESCAFÉ
SUNRISE. It also expanded its portfolio with the launch of NESCAFÉ SUNRISE
Liquid Decoction, which is a ‘ready-to-use’ coffee decoction for consumers
desiring a filter coffee experience.
Exhibit 16: Beverages – Volume/price growth Exhibit 17: Sales of Beverages grew 14.6% to INR616.9b
Volume Growth (%) Price Growth (%) Beverage sales (INR b) Growth (%)
24.8 17.9
18.0 14.6
10.6 13.7 10.6 10.6
9.3 11.2 9.8
7.8
(0.2) (2.3) 5.1
(5.0) 7.9 (3.6) (2.4) 1.2 (0.3)
1.0 (1.4) (1.7)
(11.0) (10.3) (0.7) (2.9) (3.7)
(21.3) 11.2 13.2 13.4 13.4 12.9 13.9 15.2 15.0 14.8 16.9
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
Chocolates and Confectionary (10.3%/14.5% of CY21 volume/sales)

 Despite a challenging CY21, the Chocolates and Confectionery portfolio
delivered a strong performance, with healthy growth and market share gains.
 NEST also commissioned a new KITKAT line at its Ponda factory in Goa in CY21.
 It launched Nestlé MUNCH FRUIT O NUTS, a category-first innovation, leveraging
its strong R&D capabilities and extensive consumer research insights.
 Through MUNCH and its full pack range, it continued to grow its rural footprint
by associating with festivals in India. This was further augmented through its
association with Disney Marvel, which is popular in towns across the country.
 It also launched a limited edition of KITKAT Kookie & Crème flavor across all
channels.
21 March 2022 9
Nestle India
Exhibit 18: Chocolates and Confectionary – Volume/price Exhibit 19: Sales of Chocolates and Confectionary grew 21%
growth to INR21.2b
Volume Growth (%) Price Growth (%) Chocolate and confectionary sales (INR b)
17.3 Sales Growth (%) 21.0
12.4 10.8 10.1 0.0 1.0 17.3
9.5 14.7
(1.2) 3.9 10.0
0.0 14.7 16.2 6.4 5.4 6.7
10.5 4.3
4.3 2.7 (2.6)
(2.2) 6.7
(11.4)
(9.4) (12.1)
(19.5) 11.7 12.9 12.5 11.1 11.7 12.2 14.0 16.4 17.5 21.2
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
Brand extensions/launches/product re-launches/introduction of variants

 One of the most interesting aspects of NEST in recent years is the pick-up in the
pace of launches. The company has seen a healthier launch pipeline since CY16
as compared to the past. While launches slowed down in CY17-18 v/s CY16
levels, CY19-21 saw a much more robust show.
 NEST has launched over 90 products since CY16, with 20 projects in the
pipeline. Its past efforts have begun to bear fruit, with new innovations/
renovations contributing 4.9% to CY21 sales – the highest in the past five years.
 Digitalization is a growth accelerator and will continue to be so in the future.
Leveraging the power of data and analytics is part of its business strategy. It has
a multi-intelligent data analytics system that sources internal and external data
to converge insights that trigger swift and decisive business actions.
Exhibit 20: Launches/re-launches/variants introduced over the years

Year CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21
19 (39 Nine (17 14 (20 20 (24 Nine (12 14 (19
No. of including including including including including including
Seven Three
launches variants and variants and variants and variants and variants and variants and
re-launches) re-launches) re-launches) re-launches) re-launches) renovation)
Maggi Nutri-
Maggi Hot KITKAT duo Maggi Maggi Atta MAGGI Veggie
Magg Oats Relaunched licious
1 Heads: four strawberry Nutrilicious Spinach Masala
Noodles Maggi Noodles Noodles: two
variants variant Atta Noodles Noodles Noodles
variants
MAGGI Special
Maggi No Maggi Masalas Maggi Fusian Maggi Fried
Nestlé KitKat Munch Chicken65
2 Munch Nuts Onion No of India: four Noodles (three Rice Masala -
Senses Milk Crunch-O-Nuts Masala
Garlic Masala variants variants) Classic Veg
Noodles
Nestle a+ Nesplus
Maggi Hot LACTOGEN 1 Maggi Fried Nestlé GOLD
Nestlé KitKat Cerelac Stage Grekyo greek Breakfast
3 Heads Cuppa with L. reuteri Rice Masala - Corn and Oat
Senses Dark 5 yogurts: three cereals: four
Noodles (relaunch) Chilli Garlic flakes
variants variants
Nestlé KitKat Nescafe Pre-NAN with Maggi Paneer-
Maggi Cuppa Koko Krunch
4 Senses Extra Nan Excellapro Ready-to-Drink DHA and ARA ae Magic Shahi
Masala (renovated)
Smooth Cans (relaunch) Paneer
Nestle
Maggi Special Maggi Fusian Maggi Kadhai
Nestle Masala Maggi Cuppa Resource High Koko Krunch
5 Masala Chilli Garlic Paneer Masala
Buttermilk Chilly Chow Protein: three Kookie Cereal
noodles Sauce mix
variants
Maggi Cup-a- Maggi dip & MAGGI Hot n
Milo Ready-to- Maggi Liquid Koko Krunch
6 Nestle Lassi licious Soups: spread: two Sweet Sauce -
Drink beverage Seasoning cereal
six variants variants two variants
7 NAN Lo-Lac Nestle a+ KITKAT Dessert KITKAT Dessert Maggi Lactogrow MAGGI
21 March 2022 10
Nestle India
Year CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21

Greekyo: four Delight Delight Professional Toddler Masala-vin-
variants Brownie Kubes Thai Curry Magic
Pastes (two
variants)
Nescafé E-
Nestle
Smart Coffee
Everyday KITKAT Dessert
Machine (all- NESCAFÉ ALL
Masala Fusion Milkybar (Re- Delight Rich Nestlé POLO
8 in-one travel in 1 - coffee
Dairy launch) Chocolate Extra Strong
mug and premix
Whitener: six Fudge
coffee
variants
machine)
Maggi Nutri- NESCAFÉ
Nescafe RTD: Milkybar Munch Crisp- Nestlé POLO
9 licious Baked SUNRISE
three variants Moosha Pop Paan
Noodles (renovated)
Nestle Les Milkybar NESCAFÉ
Optifast vanilla
10 Ceregrow Recettes De Moosha Cocoa SUNRISE Liquid
flavor
l'Atelier Crispies Decoction
Nestle
Nestle a+ Pro- Everyday Chai Nestlé Munch
11 Milo
grow life: three Fruit O Nuts
variants
Renovation of Nestlé a+ KITKAT Kookie
12 Cerelac with Nangrow Banglar Mishti & Crème -
Iron Doi limited edition
Nescafe Nan Pro with Cerelac NESCAFÉ
13 Sunrise Insta- DHA (Re- Organic Roasted
filter launch) Cereals* Whole Beans
Nestea Iced Ceregrow
Nan Excellapro NESCAFÉ
14 Tea: three Organic
(re-launch) Sunrise Strong
variants Cereals*
Seasonings
15 Nescafe Latte Cerelac Ragi
from MAGGI
NESTEA -
16 KITKAT Duo Optifast Instant Green
Tea Powder
POLO -
Nestle Munch
17 Maggi Upma launched in
Trio
ME
Crunch wafers
- launched in
18 Barone Charge Maggi Poha
ASEAN
markets
Nescafe
19 New Alpino Cappuccino
(renovation)
Nestea Ready-
to-Drink Iced
20
Tea (two
variants)
*The company has not shared the number of variants for Cerelac and Ceregrow Organic Cereals Source: Company, MOFSL
 Launches were the one area where the management has clearly walked-the-talk
on their stated intention after the change of guard in Jul’15. Stakeholder
interaction was another area where the company has delivered. More recently,
these have been allied with low price hikes and a rise in ad spends. The
emphasis on volume growth is clearly becoming more evident unlike in the past.
21 March 2022 11
Nestle India
Exhibit 21: Financial overview (INR b)

CY16 % CY17 % CY18 % CY19 % CY20 % CY21 %
Total Revenue 91.4 100.0 100.1 100.0 112.9 100.0 123.7 100.0 133.5 100.0 147.1 100.0
Raw Material Consumed 38.8 42.5 43.3 43.2 45.9 40.6 52.2 42.2 56.7 42.5 63.2 43.0
Gross Profit 52.6 57.5 56.8 56.8 67.0 59.4 71.4 57.8 76.8 57.5 83.9 57.0
Employee Benefit Expense 9.4 10.3 10.6 10.6 11.7 10.4 13.0 10.5 15.1 11.3 15.4 10.4
Other Expenses
Power and Fuel 2.3 2.5 2.9 2.9 3.4 3.0 3.4 2.8 3.1 2.3 4.1 2.8
Repairs 1.2 1.3 1.2 1.2 1.1 1.0 1.1 0.9 1.1 0.8 1.2 0.8
A&P spends 5.0 5.5 5.1 5.1 7.3 6.5 7.9 6.3 7.6 5.7 7.6 5.2
Freight and Transport 4.4 4.8 4.8 4.8 5.3 4.7 5.5 4.5 5.8 4.3 6.9 4.7
Royalty 4.0 4.4 4.6 4.6 5.4 4.8 6.0 4.9 6.5 4.9 7.2 4.9
Others 6.0 6.5 5.6 5.6 5.5 4.8 5.5 4.4 5.3 4.0 5.8 4.0
EBITDA 20.3 22.2 22.2 22.2 27.3 24.2 29.1 23.5 32.2 24.1 35.7 24.3
Less: Interest Expense 0.9 0.9 1.1 1.3 1.6 2.0
Less: Depreciation 3.5 3.4 3.4 3.7 3.7 3.9
Add: Other Income 1.5 1.8 2.6 2.5 1.5 1.2
Profit before Tax (PBT) 17.4 19.0 19.6 19.6 25.4 22.5 26.5 21.4 28.3 21.2 31.0 21.0
Gross and operating margin

 Net sales rose 10.2% YoY to INR147.1b in CY21. Material costs increased at a
faster pace (up 11.4% YoY), leading to a gross margin of 57% in CY21, down
50bp YoY. Gross margin remains high compared to its track record of 51-56%
seen in the first half of the last decade.
 Consumption of raw materials grew 18.1% YoY. Its proportion to net sales rose
230bp YoY to 34.8%. Packing material (7.6% of sales in CY21) contributed 130bp
to the contraction in gross margin. Outsourced manufacturing of goods rose
20.4% YoY in CY21.
 The management had stated in the analyst meet in Feb’21 that higher raw
material prices ‘are here to stay’ and there may be further gross margin
pressures in CY22. We expect a 100bp decline in gross margin YoY in CY22.
Exhibit 22: Packaging material cost may continue to increase going forward, led by a sharp
rise in crude prices
RMC as a % of net sales Packing Material as a % of net sales
7.6 7.8 7.7 7.1

6.8 7.3 6.8 6.9 6.3 7.6
37.8 37.7 38.4 35.9 35.5 36.6 34.1 35.6 36.4 35.6
21 March 2022 12
Nestle India
Exhibit 24: Employee costs (including training expenses) fell

Exhibit 23: Gross margin contracts by 50bp YoY in CY21 90bp to 10.5% in CY21
Gross margin (%) 59.4 Employee cost (as a % of net sales)
57.6 57.5 57.8 57.5 11.7 11.4

56.8 57.0
10.4 10.6 10.5 10.6 10.5
54.7 54.7 8.5 8.9

54.1 8.3
 NEST has stopped sharing breakdown of key raw material costs from CY17.
 Employee costs (including training expense) rose 1.6% YoY to INR15.4b (down
90bp YoY to 10.5% of sales) in CY21.
Exhibit 25: Sales per employee at a record high
No. of employees (#) Net sales per employee (INR m) 18.5

17.2
16.1
14.8
13.6 13.2
11.8 12.7 12.0
10.8
7,008 7,159 7,228 7,495 7,588 7,527 7,604 7,649 7,747 7,910
 Advertising and sales promotion (A&P) costs remained flat YoY at INR7.6b in
CY21. NEST does not share A&P costs in its quarterly result, and this data is only
available in its annual report.
 As a percentage of domestic/net sales, A&P expense fell 60bp/50bp YoY to
5.5%/5.2%.
 This has been the fourth consecutive year of decline in ad spends-to-sales ratio.
The latter was the second lowest in the last seven years in CY21. While the
COVID-19 pandemic in CY20 understandably led to a 70bp decline in ad spends-
to-sales ratio, we were not expecting a further decline in CY21.
 With the earlier cited pressures on gross margin, there is a risk that either
EBITDA margin may be under incremental pressure or the ad spends-to-sales
ratio can decline further in CY22.
21 March 2022 13
Nestle India
Exhibit 26: Ad spends decline by 50bp in CY21 Exhibit 27: Royalty expenses flat at 4.9%
A&P (as a % of gross domestic sales) Royalty incldg. taxes (as a % of net sales)
6.9
6.7 6.7
4.6 4.8 4.9 4.9 4.9
4.1 4.4
6.0 3.8 3.7 3.9
5.7
5.3 5.5
4.7
4.4 4.5
 As a percentage of net sales, royalty, or general license fees (including

withholding tax on general license fees), remained flat YoY at 4.9% in CY21.
 EBITDA margin grew 20bp YoY to 24.3% in CY20, led by a 90bp savings in
employee costs-to-sales and a 50bp decrease in ad spends-to-sales ratio.
Negative contributors to EBITDA margin included a 50bp decline in gross margin
and a 80bp increase in other expenses-to-sales ratio. Absolute EBITDA increased
11% YoY to INR35.7b as compared to a 10.2% growth in sales.
Exhibit 28: Other operating expenses rose 80bp YoY Exhibit 29: EBITDA margin expands by 20bp YoY to 24.3%
Other operating expenses (as a % of net sales) EBITDA margin (%)

24.2 23.5 24.1 24.3
16.1 16.1 15.6 22.3 22.2 21.3 22.2 22.2
15.4 15.3 20.1
14.5
13.6
12.6 12.3
11.5
Exhibit 30: EBITDA grew 10.9% YoY to INR35.7b in CY21
EBITDA (INR b) EBITDA growth (%)

23.3 23.0
17.9
8.7 9.4 10.7 10.9
4.0 6.3
(21.6)
18.6 20.2 21.0 16.5 20.3 22.2 27.3 29.1 32.2 35.7
21 March 2022 14
Nestle India
Exhibit 31: Adjusted PAT grew 10.8% YoY to INR23.2b in CY21
Adj. PAT (INR b) Adj. PAT growth (%) 27.5
13.2 13.1
10.8
8.0 6.8 6.1 7.6
3.2
(7.3)
11.0 11.8 12.5 11.6 11.9 13.5 17.2 19.5 21.0 23.2
Capex, fixed assets, working capital, and cash flows

 Capex stood at INR7.3b in CY21, with capex-to-sales ratio down 260bp YoY to
4.9%. Depreciation stood at INR3.9b. CY21 is the second year, after seven years
in a row, where annual capex has been ahead of depreciation. This, in turn, has
led to an increase in net fixed assets + CWIP.
 The ongoing capex of INR26b may result in increased net fixed assets and
possibly impact improvement in fixed asset turnover unless sales momentum
picks up substantially.
Exhibit 33: Depreciation, as a percentage of EBITDA, stood

Exhibit 32: Capex stood at INR7.3b in CY21 at 10.9% in CY21 down from 11.5% in CY20
Capex (INR m) Depreciation (INR m) Depreciation as a % of EBITDA

21.1
10,075*
16.3 16.1 17.4

14.9 15.4
8,476
12.3 12.7 11.5

10.9
7,263*
4,262
2,772
3,300
3,375
3,473
3,537
3,423
3,357
3,702
3,704
3,902
1,000
1,693
1,380
559
944
388

*includes Right-of-Use assets
Exhibit 34: Capex continues to remain substantial after the

resurgence in CY20 (%) Exhibit 35: Asset turnover decreases YoY
Capex/Sales Sales/Net Fixed Assets (incl. CWIP)
10.2 5.2 5.3

4.9
4.3
7.5 3.6
2.8 3.0
4.9 2.6 2.5 2.5
4.7
0.6 1.2 1.1 1.7 1.2 0.3
21 March 2022 15
Nestle India
 Pension plan: In CY21, the defined benefit pension scheme for certain categories
of employees was modified and replaced by a future ready plan effective 1st
Dec’21.
 The future ready plan is a combination of amended Defined Benefit Pension
Scheme for the past period of service and a Defined Contribution Scheme for
future service.
 Under the future ready plan, liability towards a certain category of pensioners
has been transferred to an Insurance company and future annuities will be paid
by the Insurance company.
Exhibit 36: Schedule of movement in defined benefit obligations and plan assets in CY21
st st
31 Dec’21 31 Dec’21
Gratuity Pension Gratuity Pension
Movement in defined benefit obligation and plan assets Pension Scheme
Scheme Scheme Scheme Scheme
Funded Future
Funded Unfunded Funded Unfunded
Ready Plan
Plan Plan Plan Plan
i) Change in defined benefit obligation (DBO:
Present value of obligation, as at the beginning of the year 2,217 - 21,960 1,939 19,107
Reclassification of opening balance on change in the Pension Plan - 14,795 -14,795 - -
Current service cost 138 511 359 123 814
Past service cost - 1,768 - - -
Settlement cost - 577 14 - -
Interest cost 143 992 479 127 1,274
Actuarial loss/(gain) 315 948 757 139 1,221
Actual benefits paid -185 -800 -290 -111 -456
Settlement to Insurance company for pensioners - -5,185 - - -
Others - 7 - - -
Present value of obligation as at the end of the year 2,628 13,614 8,483 2,217 21,960
ii) Change in plan assets:
Plan assets as at the beginning of the year 1,943 - - 1,813 -
Expected return on plan assets 140 - - 119 -
Contribution by the company 434 - - - -
Return on plan assets, greater/(lesser) than expected return -5 - - 123 -
Actual benefits paid -185 - - -111 -
Plan assets as at the end of the year 2,326 - - 1,943 -
Net liability recognized in the Balance Sheet 302 13,614 8,483 274 21,960
of which accounted as:
Non-current provisions 302 13,263 8,089 274 21,534
Current provisions - 351 395 - 425
iii) Reimbursement Rights
Opening balance as at the beginning of the year - - - - -
Investments during the year - 13,788 - - -
Return on investments - 93 - - -
Benefit payments - -266 - - -
Investments as at the end of the year - 13,614 - - -
Source: MOFSL, Company
21 March 2022 16
Nestle India
Exhibit 37: Changes in actuarial assumptions in CY21

st st
31 Dec’21 31 Dec’21
Gratuity Pension Gratuity Pension
Key actuarial assumptions Pension Scheme
Scheme Scheme Scheme Scheme
Funded Future Ready
Funded Unfunded Funded Unfunded
Plan
Plan Plan Plan Plan
Discount rates (%) 6.75 6.75 6.75 6.75 6.75
Expected rate of salary increases (%)
- First five years 6.2 to 13.7 7.7 to 11.3 7.7 to 11.3
- Beyond five years 3.6 to 9.3 5.50 6.50
Expected rate of pension increases (%) - 2.5 3.25 to 3.50 - 3
Source: MOFSL, Company
 Debtor days remained at its historical average of three-to-four days. Inventory

days remained flat YoY at 37 days. Creditor days fell by a day YoY to 40 days. Net
working capital (NWC) days worsened marginally by a day in CY21 from zero
days in CY20.
Exhibit 38: Cash conversion cycle remains healthy in CY21

Cash conversion cycle (on an avg. basis) CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21
Inventory Days 33 30 29 37 35 34 30 33 37 37
Add: Trade Receivable Days 4 3 3 4 4 3 3 4 4 4
Less: Trade Payable Days 22 24 25 33 31 33 36 40 41 40
Cash Conversion Cycle 15 10 7 8 8 5 (2) (3) 0 1
Exhibit 39: Breakup of inventory days

On an average basis CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21
Inventory days 32 30 29 37 35 34 30 33 37 37
Raw material days 9 8 10 12 13 12 10 12 14 14
Packing material days 1 1 1 1 1 1 1 1 2 2
Work-in-progress days 5 4 3 4 3 4 4 3 4 5
Finished goods and stock-in-trade days 16 14 14 18 16 15 14 14 15 15
Stores and spares days 2 2 2 2 2 2 2 2 2 2
 Operating/free cash flow fell 7.5%/22.2% YoY to INR22.7b/INR15.4b in CY21.

The decline in FCF was on account of significant (INR7.3b) capex in CY21.
 Operating cash grew at 5.7% CAGR over CY17-21, led by P&L improvements and
NWC days being back to negative/near zero levels for the past four years on
lower inventory levels and higher creditors.
 Inventory days have remained flat YoY at 37 days in CY21. RM days rose to 14
days in CY20/CY21 from 10/12 days in CY18/CY19. This is due to the prudent
stocking of materials in the wake of COVID-led supply disruptions as well as
rising commodity prices.
21 March 2022 17
Nestle India
Exhibit 40: FCF-to-sales ratio declines YoY, % Exhibit 41: OCF/total assets remains steady, but falls YoY, %
FCF/Sales OCF/Total Assets 34.0
17.3 31.5
16.1 16.2 16.7 28.6
14.9 14.8 14.8
25.1 24.4 25.2
11.6 22.4 21.7 22.6 21.8
10.5
8.6
Exhibit 42: Payout ratio remains high (inordinately high in CY19 due to special dividend)
Payout (%) 169.3
92.0
83.0
61.4 64.4
42.5 48.7 50.9
39.8 40.5
 As cash and cash equivalents rose significantly over CY15-18 levels, it declared a
special dividend, leading to a sharp payout (169%) in CY19 v/s 64% in CY18.
NEST continued its higher payout levels in CY20/CY21 with a 92%/83% payout.
 With higher dividend payouts over CY19-21, return ratios improved significantly.
RoE/RoCE rose to 113.2%/109.5% in CY21.
 As indicated by the company, it has approved a scheme of arrangement to
transfer the entire balance of general reserve i.e. INR8,374m to retained
earnings. It has received ‘no observation letter’ from BSE Ltd. and is in process
of filing application with NCLT.
 As highlighted by company in one of its BSE filing, the utilization of the amount
transferred shall be available for payout to members. Hence, we expect a
possibility of higher dividend payout in the coming years.
Exhibit 43: RoE and RoCE improve significantly in CY21 due to higher payouts
RoE (%) RoCE (%)

113.2
106.5
109.5
107.2
71.6
69.7
56.4
71.9
48.5
47.9
40.9
50.2
40.3
39.1
43.9
41.7
40.8
40.7
39.2
37.5
21 March 2022 18
Nestle India
Channel expansion
 NEST set out on its RURBAN (quasi-rural) strategy by: 1) using a mix of
customized portfolios, 2) direct distribution, 3) enhancing its distribution
infrastructure, 4) deployment of resources, 5) regional and localized
communication, 6) enhancing its visibility by participating in village haats, and 7)
building a consumer connect.
 Through Project RURBAN, it reached out to small towns with a population of less
than 100,000 and large villages with a population greater than 2,000 with an eye
on long-term growth opportunities.
 NEST’s e-commerce channel showed strong acceleration on the back of new
emerging formats such as quick commerce and ‘Click & Mortar’, leading to
lower delivery timeframes and improved customer experience. Last mile access
was ensured with the help of hyperlocal/quick commerce channels.
 Resumption of mobility after the second COVID wave paved the way for channel
stabilization and customer engagement increased across offline channels.
Exhibit 44: Growing contribution of e-commerce in domestic sales
E-commerce contribution to domestic sales 3.7
1.9
1.3
0.9
0.6
CY16 CY17 CY18 CY19 CY20
Supply chain
 NEST has developed a resilient supply chain that was able to overcome
disruptions caused by the second COVID wave. The company sources raw
materials from more than 400 suppliers and over 100,000 farmers.
 The management said the price outlook for key categories like edible oils,
coffee, wheat, and fuel remained firm to bullish, while the costs of packaging
materials continued to increase amid supply constraints, rising fuel prices, and
transportation cost.
 It expects the bullish trend in input prices to continue both globally and to some
extent locally.
 Fresh milk prices are expected to remain firm, with a continued increase in
demand and rise in feed costs for farmers.
 NEST is accelerating its commitment towards sustainability by increasing
purchases of sustainable oils, coffee, cocoa, etc.
 To address short-term disruptions, it augmented its co-manufacturing strategy
to enable speed to market and accelerated the paperless invoicing platform.
 The company shifted to a shorter planning horizon, focusing on priority SKUs,
channel-wise planning, and up-scaled its transport control tower to enhance
stock and transit visibility.
21 March 2022 19
Nestle India
Diversity
 NEST has a multi-generational workforce, with millennials constituting 72%.
 Women comprised 43% of new hires in CY21. At its Sanand factory in Gujarat,
women constitute 70% of the workforce.
 Around 54% of recruited trainees were women.
Sustainability
 NEST has accelerated its sustainability mission by working across four
commitments related to climate, packaging, sourcing, and water, where its
efforts encompass the entire value chain to actively engage with all stakeholders
to increase awareness about the planet.
 Through NESCAFÉ Plan and MAGGI Spice Planplans and partnerships with dairy
farmers, NEST has collaborated with farmers on environmental sustainability
programs.
 All brands continue to be plastic neutral, which means the quantum of plastic
used in packaging is compensated by what is collected and recycled.
 It continues to focus on improving operational efficiencies by reducing
consumption of natural resources and reduction in energy and GHG emissions.
 From CY06 to CY21, it reduced the usage of energy/water/wastewater
generation/specific direct GHG emissions by ~ 43%/~52%/~67%/57% for every
tonne of production.
 Renewable energy: Key renewable energy projects contributed to GHG savings.
This was implemented through higher purchase of solar power for the Choladi
and Nanjangud factories and replacement of fossil fuel with clean fuel for steam
generation at the Bicholim factory.
 Packaging and Plastic Waste Management: The aim is to annually eliminate
30m plastic straws. The substituted paper straws are responsibly sourced from
renewable sources and certified by the Forest Stewardship Council (FSC). This
transition has been incorporated in the packs of NESCAFÉ range of cold coffees.
 EPR initiative: NEST has engaged with various waste agencies for end-to-end
management of plastic waste. In CY21, it achieved an EPR of 23,600MT through
plastic waste management.
21 March 2022 20
Nestle India
Exhibit 45: Incremental initiatives to improve NEST’s sustainability quotient
Exhibit 46: All of NEST’s major brands are now plastic neutral
21 March 2022 21
Nestle India
Other salient talking points from the annual report

 R&D spends stood at INR265.6m/INR108.8m (recurring/capital R&D). Total R&D
spends stood at INR374.4m in CY21 and constituted 0.26% of net sales.
Exhibit 47: R&D expenditure as a percentage of sales stood at 0.26%
(INR m) CY19 CY20 CY21
Capital 32 26 109
Recurring 201 233 266
Total 233 259 374
R&D expenditure as a percentage of net sales 0.2 0.2 0.3
 In CY21, total remuneration of MD Mr. Suresh Narayanan was INR188.1m (up

9.4% YoY). Mr. David McDaniel, Director - Finance & Control and CFO, earned
INR80.7m in CY21.
Exhibit 48: MD’s remuneration rose 9.4% in CY21; increase in median remuneration stood at 10.8%
Name of the employee Designation CY19 CY20 CY21
Mr. Suresh Narayanan Chairman and Managing Director 161.7 171.9 188.1
YoY increase (%) 45.9 6.3 9.4
Mr. Shobinder Duggal/
# Director - Finance & Control and CFO 46.9 49.2 80.7
Mr. David Steven McDaniel
YoY increase (%) 10.6 4.9 Not comparable
# st
Appointed as Whole-time Director, designated as Executive Director – Finance & Control and CFO with effect from 1 Mar’20;
 In CY21, the defined benefit pension scheme for certain categories of employees
was modified and replaced by a future ready plan. This resulted in a one-time
exceptional item of INR2.4b. Other income fell due to lower average liquidities
following transition to the future ready plan, but was partly offset by higher
yields.
 In CY21, earnings from exports stood at INR6.4b. Of this, INR2.4b was earning
from Nepal and Bhutan. Forex earnings stood at INR4b.
 Foreign exchange outgo stood at INR24.6b, which includes general license fees,
imports, dividend paid, and travel expenses.
 Contingent liabilities and commitments at the end of CY21 stood at INR1.9b
(indirect taxes and capital expenditure commitments) v/s INR3.2b in CY20.
 The company met its CSR commitment spends of INR528m in CY21.
Valuation and view

 There is no material change to our CY22 and CY23 EPS forecasts.
 The long-term narratives for revenue and earnings growth are highly attractive.
The Packaged Foods segment in India offers immense growth opportunities. This
is particularly true for a company such as NEST, which has a strong pedigree and
distribution strength. The successful implementation of its volume-led growth
strategy in recent years provides confidence in execution as well.
 Valuations at 59.5x CY23E P/E are, however, expensive and do not offer any
significant upside from a one-year perspective. We value the company at 60x
Mar’24E EPS to arrive at our TP of INR18,700. We maintain our Neutral stance.
21 March 2022 22
Nestle India
Exhibit 49: NEST’s P/E (x)

P/E (x) Avg (x) Max (x) Min (x) +1SD -1SD
86.0 81.6
66.2
68.0
53.2 66.0
50.0
40.1
32.0 36.5
14.0
Jun-13
Jun-18
Mar-12
Sep-14
Dec-15
Mar-17
Sep-19
Dec-20
Mar-22
Exhibit 50: P/E (x) for the Consumer sector excluding ITC
P/E (x) Avg (x) Max (x) Min (x) +1SD -1SD
60.0
50.5
50.0
43.6
40.0 40.2
38.4 33.3
30.0 26.7
20.0
Jun-13
Jun-18
Mar-12
Sep-14
Dec-15
Mar-17
Sep-19
Dec-20
Mar-22
21 March 2022 23
Nestle India
Financials and valuations

Income Statement (INR b)
Y/E December CY17 CY18 CY19 CY20 CY21 CY22E CY23E
Net Sales 100.1 112.9 123.7 133.5 147.1 167.0 188.7
Change (%) 9.5 12.8 9.5 7.9 10.2 13.5 13.0
Gross Profit 56.8 67.0 71.4 76.8 83.9 93.5 107.6
Margin (%) 56.8 59.4 57.8 57.5 57.0 56.0 57.0
Other Expenditure 34.6 39.7 42.4 44.6 48.2 54.7 63.2
EBITDA 22.2 27.3 29.1 32.2 35.7 38.8 44.4
Change (%) 9.4 23.0 6.3 10.7 11.0 8.7 14.5
Margin (%) 22.2 24.2 23.5 24.1 24.3 23.2 23.5
Depreciation 3.4 3.4 3.7 3.7 3.9 4.8 5.5
Int. and Fin. Ch. 0.9 1.1 1.3 1.6 2.0 2.1 2.3
Other Inc.- Rec. 1.8 2.6 2.5 1.5 1.2 1.6 2.1
PBT 19.6 25.4 26.5 28.3 31.0 33.5 38.7
Change (%) 13.1 29.5 4.3 6.6 9.5 8.2 15.4
Margin (%) 19.6 22.5 21.4 21.2 21.0 20.1 20.5
Tax 6.1 8.2 7.1 7.3 7.7 8.4 9.7
Tax Rate (%) 31.3 32.3 26.6 25.8 25.0 25.2 25.2
Adjusted PAT 13.5 17.2 19.5 21.0 23.2 25.1 28.9
Change (%) 13.2 27.5 13.1 7.6 10.8 8.0 15.4
Margin (%) 13.5 15.2 15.7 15.7 15.8 15.0 15.3
Non-rec. (Exp.)/Inc. 1.2 1.1 0.2 0.1 1.8 0.0 0.0
Reported PAT 12.3 16.1 19.2 20.8 21.4 25.1 28.9
Balance Sheet (INR b)

Share Capital 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Reserves 33.2 35.8 18.2 19.2 19.9 20.8 20.8
Net Worth 34.2 36.7 19.2 20.2 20.8 21.8 21.8
Loans 0.4 0.4 0.5 1.5 2.7 2.7 2.7
Capital Employed 34.6 37.1 19.7 21.7 23.5 24.5 24.5
Gross Block 33.6 34.9 34.9 40.0 51.2 56.2 61.2

Less: Accum. Depn. 7.4 10.8 13.8 18.2 21.2 26.0 31.5
Net Fixed Assets 26.2 24.0 21.1 21.8 29.9 30.2 29.6
Capital WIP 0.9 1.1 1.4 6.4 2.5 2.5 2.5
Investments 19.8 26.6 18.3 15.5 22.2 22.7 23.2
Current 13.9 19.3 10.1 7.2 0.6 0.7 0.8
Non-current 5.9 7.3 8.2 8.3 21.6 22.0 22.4
Curr. Assets, L&A 26.7 29.2 30.9 35.1 27.2 36.0 39.9
Inventory 9.0 9.7 12.8 14.2 15.8 17.2 16.7
Account Receivables 0.9 1.2 1.2 1.6 1.7 1.4 1.5
Cash and Bank Balance 14.6 16.1 13.1 17.7 7.4 14.5 15.5
Others 2.2 2.2 3.7 1.6 2.4 3.0 6.2
Curr. Liab. and Prov. 37.8 43.2 51.9 57.3 58.6 67.2 71.0
Account Payables 9.8 12.4 14.9 15.2 17.3 19.9 22.0
Other Liabilities 4.2 4.6 7.0 8.4 7.0 10.0 7.5
Provisions 23.8 26.2 29.9 33.7 34.2 37.3 41.5
Net Curr. Assets -11.1 -14.0 -21.0 -22.2 -31.4 -31.1 -31.1
Def. Tax Liability -1.2 -0.6 -0.1 0.2 0.3 0.3 0.3
Appl. of Funds 34.6 37.1 19.7 21.7 23.5 24.5 24.5
E: MOFSL estimates
21 March 2022 24
Nestle India
Financials and valuations

Ratios
Basic (INR)
EPS 140.0 178.6 202.0 217.4 240.8 260.0 299.9
Cash EPS 175.5 213.4 240.4 255.8 281.3 309.5 357.1
BV/Share 354.8 381.0 199.0 209.4 216.2 226.2 226.1
DPS 86.0 115.0 342.0 200.0 200.0 250.0 300.0
Payout (%) 61.4 64.4 169.3 92.0 83.0 96.2 100.0
Valuation (x)
P/E 127.6 100.0 88.4 82.1 74.2 68.7 59.5
Cash P/E 101.8 83.7 74.3 69.8 63.5 57.7 50.0
EV/Sales 16.9 14.9 13.7 12.7 11.5 10.1 8.9
EV/EBITDA 76.0 61.5 58.2 52.6 47.5 43.5 38.0
P/BV 50.3 46.9 89.7 85.3 82.6 79.0 79.0
Dividend Yield (%) 0.5 0.6 1.9 1.1 1.1 1.4 1.7
Return Ratios (%)

RoE 40.3 48.5 69.7 106.5 113.2 117.5 132.6
RoCE 41.7 50.2 71.9 107.2 109.5 111.0 125.2
Working Capital Ratios
Debtor (Days) 3.2 4.1 3.7 4.5 4.1 3.0 3.0
Asset Turnover (x) 2.8 3.1 4.3 6.5 6.6 7.0 7.8
Leverage Ratio
Debt/Equity ratio (x) 0.0 0.0 0.0 0.1 0.1 0.1 0.1
Cash Flow Statement (INR b)

OP/(loss) before Tax 18.4 24.3 26.7 28.1 28.8 34.0 38.9
Int./Div. Received 1.4 2.5 2.4 1.4 1.2 1.6 2.1
Depn. and Amort. 3.4 3.4 3.7 3.7 3.9 4.8 5.5
Interest Paid 0.0 0.0 0.0 0.2 0.0 2.1 2.3
Direct Taxes Paid 6.0 8.8 6.7 7.0 7.3 8.4 9.7
Incr. in WC 3.7 4.1 1.6 1.0 -1.5 6.9 1.1
CF from Operations 18.2 20.5 23.0 24.5 22.7 37.7 35.9
Others 0.6 -2.6 11.7 4.4 -5.6 1.1 1.8

Incr. in FA 2.0 1.6 1.5 4.7 7.3 5.0 5.0
Free Cash Flow 16.2 18.9 21.4 19.8 15.4 32.7 30.9
Pur. of Investments 1.1 1.6 0.2 0.0 0.0 0.5 0.5
CF from Invest. -2.4 -5.8 10.0 -0.4 -12.9 -4.4 -3.7
Incr. in Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Dividend Paid 8.3 10.9 29.5 18.9 19.3 24.1 28.9
Others -1.7 -2.3 -6.5 -0.7 -0.9 -2.1 -2.3
CF from Fin. Activity -10.0 -13.2 -36.0 -19.6 -20.2 -26.2 -31.2
Incr./Decr. in Cash 5.8 1.5 -3.0 4.6 -10.3 7.1 1.1

Add: Opening Balance 8.8 14.6 16.1 13.1 17.7 7.4 14.5
Closing Balance 14.6 16.1 13.1 17.7 7.4 14.5 15.5
E: MOFSL estimates
21 March 2022 25
Nestle India
NOTES
21 March 2022 26
Nestle India
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >=15%
SELL < - 10%
NEUTRAL < - 10 % to 15%
UNDER REVIEW Rating may undergo a change
NOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30 days take
appropriate measures to make the recommendation consistent with the investment rating legend.
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9 MOFSL has not received any compensation or other benefits from third party in connection with the research report
10 MOFSL has not engaged in market making activity for the subject company
********************************************************************************************************************************
The associates of MOFSL may have:
- financial interest in the subject company
- actual/beneficial ownership of 1% or more securities in the subject company
- received compensation/other benefits from the subject company in the past 12 months
- other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific
recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even though there might exist an
inherent conflict of interest in some of the stocks mentioned in the research report.
- acted as a manager or co-manager of public offering of securities of the subject company in past 12 months
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The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report
21 March 2022 27
Nestle India
Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not consider demat accounts
which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income from clients which are not considered in above disclosures.
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21 March 2022 28

Nestle India - Annual Report Update (Building Blocks in Place For Healthy Growth) - MOSt

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21 March 2022

Annual Report Update | Sector: Consumer

Krishnan Sambamoorthy – Research Analyst (Krishnan.Sambamoorthy@MotilalOswal.com)

Ad spends-to-sales ratio to see a notable decline

Launches and digitalization

Sustainability and efficiency

 EPR (Extended Producer Responsibility) Initiative: NEST has engaged with

Valuation and view

Exhibit 1: NEST’s segment-wise performance

Strong domestic volume growth in a tepid environment

Exhibit 2: Net sales grew 10.2% YoY to INR147.1b in CY21

10.9 11.8 12.8 10.2

Exhibit 3: Domestic sales grew 10.7% YoY to INR139.9b in CY21

Domestic (INR b) Domestic sales growth (%)

(10.7) (2.8) (0.4) (0.4)

Exhibit 6: Weighted average realization growth up 3.1% in CY21

Source: Company, MOFSL

12.1 12.3 10.9 10.9 10.7

Source: Company, MOFSL Source: Company, MOFSL

Exhibit 9: Volume mix Exhibit 10: Sales mix

Prepared Dishes and Cooking Aids (60.4%/31.1% of CY21 volume/sales)

9.5 (1.8) 0.2 (0.1) 16.8 14.7 12.7 11.8 16.3

Maggi Tonnage growth (%) Non-Maggi Tonnage growth (%)

19.0 14.5 16.4

(0.1) (7.0) (0.6) 3.2 7.4 3.9 2.5

Milk and Nutrition (24.8%/42.8% of CY21 volume/sales)

Source: Company, MOFSL Source: Company, MOFSL

Beverages (4.5%/11.6% of CY21 volume/sales)

Source: Company, MOFSL Source: Company, MOFSL

Chocolates and Confectionary (10.3%/14.5% of CY21 volume/sales)

Brand extensions/launches/product re-launches/introduction of variants

Exhibit 20: Launches/re-launches/variants introduced over the years

Year CY14 CY15 CY16 CY17 CY18 CY19 CY20 CY21

Exhibit 21: Financial overview (INR b)

Gross and operating margin

RMC as a % of net sales Packing Material as a % of net sales

7.6 7.8 7.7 7.1

Source: Company, MOFSL

Exhibit 24: Employee costs (including training expenses) fell

Gross margin (%) 59.4 Employee cost (as a % of net sales)

57.6 57.5 57.8 57.5 11.7 11.4

54.7 54.7 8.5 8.9

Source: Company, MOFSL Source: Company, MOFSL

Exhibit 25: Sales per employee at a record high

No. of employees (#) Net sales per employee (INR m) 18.5

Source: Company, MOFSL Source: Company, MOFSL

 As a percentage of net sales, royalty, or general license fees (including

Other operating expenses (as a % of net sales) EBITDA margin (%)

Source: Company, MOFSL Source: Company, MOFSL

Exhibit 30: EBITDA grew 10.9% YoY to INR35.7b in CY21

EBITDA (INR b) EBITDA growth (%)

Source: Company, MOFSL

Exhibit 31: Adjusted PAT grew 10.8% YoY to INR23.2b in CY21

Adj. PAT (INR b) Adj. PAT growth (%) 27.5

Source: Company, MOFSL

Capex, fixed assets, working capital, and cash flows

Exhibit 33: Depreciation, as a percentage of EBITDA, stood

Capex (INR m) Depreciation (INR m) Depreciation as a % of EBITDA

16.3 16.1 17.4

12.3 12.7 11.5

Source: Company, MOFSL Source: Company, MOFSL

Exhibit 34: Capex continues to remain substantial after the