Nestle India, subsidiary of NESTLÉ S.A. of Switzerland, is a leading FMCG company of India (FMCG is the acronym for fast moving consumer goods) with a number of marquee brands across product categories. It has 8 factories and a large number of co-packers across the country. Few of the company’s brands such as Maggi and Nescafe are market leaders in their respective categories. The company has been in existence for more than a century and is present across the length and breadth of the country.
About NESTLÉ S.A.
Present in 191 countries around the world, Nestlé S.A. is the world’s largest food and beverage company with more than 2,000 brands ranging from global icons to local favourites.
|Beverages||Nescafe, Nescafe Classic, Nescafe Sunrise, Nestea, Nescafe Cappuccino, Nescafe Gold|
|Breakfast Cereals||Nesplus Fillows, Kokos, Granola, Cerelac|
|Chocolates & Confectionery||Nestle Classic, KitKat, Munch, BarOne, Milkybar, Eclairs, Polo, Party Treats|
|Milk Products and Nutrition||Grekyo Yoghurt, Ready to Drink, Everyday, Dahi, Slim Milk, Raita, Probiotic Dahi, Milkmaid|
|Prepared Dishes and Cooking Aids||Maggi Instant Noodles, Soups, Sauce, Hot Heads, Chicken Noodles, Oats, Atta Noodles, Bhuna Masala, Coconut Milk Powder, Maggi Masala, Pazzta, Ketchup|
Solidification of leading position in existing brands:
Nestle holds a leadership position in many product categories – over 85% of the product portfolio. It enjoys enormous brand recall in products like instant noodles (Maggi), instant coffee (Nescafe), chocolates (Classic, KitKat, Munch, Milkybar), Cereals (Cerelac, Lactogen). These brands are cash generators for the company as they have good margins and tremendous operating leverage. The company focuses on making these brands available in as many retail outlets as possible to leverage on the name that has been created over the years. These brands will continue to bring in much needed cash for distribution to shareholders and for investments in new products.
Investment in new brands:
Nestle continually enters different product categories which are synergistic with its existing product portfolio to push more products through its existing channels. This helps the company gain higher share of the consumer’s wallet. While many of these products do not achieve the desired scale and are phased out or brought back to the drawing board, some of them go on to become blockbusters and contribute massively to the topline and bottomline. All this is done at minimal capital expenditure helping the company grow with very low investments.
Nestle’s management steered the company out of the Maggi fiasco and brought the company back on the growth track in record time. The management is now committed to introducing products in health and wellness, to diversify the stream of revenue and expand the product portfolio. With the management’s focus towards profitable growth, we believe, Nestle will keep growing at a brisk pace and keep rewarding its shareholders with decent dividends.
With the existing line of products and new products in the pipeline, we believe Nestle can post revenue growth of high single digits, with EBITDA margins of 20-22%.
The FMCG sector is the fourth largest sector in the Indian economy with household and personal care accounting for 50% of sales. Lifestyle changes, rising income, increased awareness and better availability are some of the key drivers of FMCG demand in India. Major FMCG sales (55%) come from urban India; however, rural is catching up fast led by growing aspirations and improved reach of FMCG companies led by better infrastructure.
The retail market is estimated to be US$ 1 trillion while the FMCG sector revenues reached US$ 53 billion. The market is set to grow significantly led by the advent of GST (Goods and Services Tax), growing reach of modern retail, improving economy and high share of youth in the population composition.
|Gross Profit Margin||64.28%||64.78%||63.86%||64.00%||64.00%||64.00%|
|Power & Fuel Cost||222.00||233.00||288.00||318.00||350.00||385.00|
|Employee Benefits Expenses||913.00||902.00||1017.00||1107.00||1224.00||1346.00|
|Other Manufacturing Expenses||755.00||872.00||920.00||997.00||1085.00||1194.00|
|General & Administration Exp||683.00||783.00||806.00||877.00||965.00||1061.00|
|Selling & Distribution Exp||912.00||963.00||1011.00||1096.00||1206.00||1326.00|
|Less: Expenses Capitalised||-||-||-||-||-||-|
|Profit Before Tax and Exceptional Items||1314.00||1556.00||1839.00||2103.00||2338.00||2591.00|
|Profit Before Tax||814.00||1545.00||1839.00||2103.00||2338.00||2591.00|
|Profit After Tax||563.00||1001.00||1225.00||1401.00||1557.00||1725.00|
|Share of Associates||-||-||-||-||-||-|
|Consolidated Net Profit||563.00||1001.00||1225.00||1401.00||1557.00||1725.00|
|No of shares||9.60||9.60||9.60||9.60||9.60||9.60|
At the current market price of Rs. 10,226, the stock trades at a PE of 70x CY18E EPS and 63x CY19E EPS. We recommend ‘Buy’ with a target price of Rs. 12,210, valuing the stock at a PE of 75x CY19E EPS.