ValuePickr Forum

Nestle India - FMCG Play

Nestle India is well-known Company. There is already a very comprehensive thread on FMCG sector as a whole, that, provides very good insights on how to look at FMCG sector.


This thread is to discuss the prospects of Nestle India.

The company sells in 4 main categories.

Previous years’ numbers:

Sales (in Million INR) 2014 2015 2016 2017
Milk Products & Nutrition 45752.3 46694 47136.6 48192.44
Prepared Dishes & cooking aids 29612.7 13141 22988.9 27090.88
Confectionary 12532.2 11108.6 11842.5 12212.8
Powdered & Liquid beverages 13397.8 13360 12949.2 13874.9
101295 84303.6 94917.2 101371.02

(Being a subsidiary of Nestle SA, the company follows January~December as a financial year)

Milk products & Nutrition: Forms 48% of total sales.
This includes Dairy Creamer (Everyday), Infant Formula(Lactogen, NAN) Infant Cereals(Cerelac). In infant products, they have a 97% market share. Majority of these sales come through prescription by doctors. Half of the company’s field force is involved in pushing these sales in the medical fraternity. (From H12018 analyst call).
Nutrition products include RESOURCE (a whey protein supplement), and few other products for diabetic patients.

Prepared Dishes & cooking aids Forms 28% of sales
This has the legendary brand MAGGI - Instant Noodle, Pasta, Ketchup & Sauces. They used to have ~67% market share before Maggi crisis of 2015. But after the relaunch, they were able to become a market leader in a very short time. There are multiple new launches in the last couple of years - Maggi Hot heads, Maggi regional flavors, Maggi masala as a standalone product.

Confectionary: Forms 12.7% of total sales
Relaunch of Barone has got good response from customers. While existing produts like Kitkat, Munch, Milkybar continue to be leaders in their niche.

Powdered & Liquid beverages: Forms 12.7% of sales.
This category has Nescafe, MILO, Nestea. The company recently launched cold coffee variant in order to capture health conscious people moving away from Sugar/soda drinks like cola.

Financials:


Ignoring 2015 (Maggi crisis event), Company has managed to maintain/grow OPM.
For the past 11 years, Top line grew at 12% CAGR.

Key Takeaways from H1 2018 Analyst call:

  • 33 new products were launched, out of which 25 are still being continued. They form around 3% of total sales. Company would ideally like to take this number to 5%
  • Analyst comment: Why not take a cut in margin by aggressive advertising new products to capture market share?
  • Company Response - Most of the products that failed are mainly due to a misunderstanding between product offering and consumer expectation. More advertisements will only make this problem worse.
  • Company is optimising it’s distribution network to ensure better product availability and reduce costs
  • Focusing on Healthcare products as there is a clear need going forward. Strategy is to make a solid base with protein products first and then expand into special need products.
  • Initial focus of the company is mainly urban-centric, but now with “Jio effect” the gap between urban and rural customers is reducing. Company needs to adapt accordingly for rural penetration.
  • Threat from private labels is not to be worried about (atleast as of now)

Investment rationale:

  • Growth from Milk products and infant nutrition has been very low. Going forward we can only expect growth from Prepared meals (Maggi) Category and in very long-term from healthcare category.
  • Presence of Nestle SA(holding company) in many different countries is a big plus for process optimization and helps in providing headstart to other product launches in India.
  • Product expansion is picking up pace after the Maggi crisis. Nesplus - breakfast cereals is gaining traction and management indicated potential launches in Indian breakfast categories.

Caveats:

  • Since this is one of the huge FMCG players of the country, we can’t expect an exponential growth or value unlocking going forward.
  • Though company is aggressive in launching new products, it takes time to build ubiquitous brands. So this more of a long-term, slow and steady compounder.

It would be very helpful if fellow members can provide any other insights or what’s technical point of view to watch out for (if convinced of fundamental growth potential)

Disclosure : No holding. On watchlist.

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My 2 cents:

  1. Milk products and nutrition segment: It has pricing power and major market share, but growth is not going to be as in the past due to high base and competition. I think it will keep same margin or bit of reduced margin due to competition eating up in years forward and will increase product prices moderately wrt inflation rates.

  2. Prepared dishes and cooking aids:Lowest realisation/ton segment but volume growth will remain high which will drive future growth of the company, mostly same growth rates as earlier, but whether same growth happens in realisation needs to be seen.

  3. Powdered and liquid beverages: Highest realisation segment, second rung of growth will come from this segment but again is realisation will keep pace with volume growth rates as competition is huge in this segment

  4. confectionary segment I think will remain flat to no growth.

In all segments it has huge brand recall and will drive it forward.
I think company needs to launch few products instead of many and focus on those products to stick to customers mind as it has done with other brands(maggi,nescafe etc.)
Its distribution network is huge so operating leverage will boost its consumption of new products.

1 Like

Hi,

I personally feel that Nestle India can grow at reasonably good rates from hereon.
Reasons-

(a) Its biggest product categories- infant and child nutrition are under penetrated… BIG TIME. Cerelac, NAN and Lactose brands can continue to grow in INDIA for a couple of decades. In a country, where sanitary Pads have a penetration of less than 10% of female population, imagine how many infants /children would be taking these nutrition supplements.

(b) Plus the competition in this segment is limited. Nestle enjoys run away market shares in the categories.

© Same logic can be extended to branded high quality Tomato Ketchup, Other Maggi extensions…like spreads, Coffee and Confectionery.

Concerns-

(a) Valuations ( obviously )…But exiting and reasonably safe an steady opportunities seldom come cheap.

(b) Nestle has demonstrated significant lethargy wrt their confectionery business in the past. I hope they do better in future. The combined portfolio of Bar One, Kit Kat, Milkybar and Munch deserves much better market share…all it needs is some degree of product innovation and marketing push.

Although the management has shown some intent in the last six months or so by launching new variants of KITKAT, the same needs to be sustained.

To sum up, I think it can be a very reliable and steady compounder from hereon. Company’s position in most individual categories is enviable. It should take a herculean effort on the part of the management to goof up going forward.

Disc: Invested.

Other Sectoral Holdings- Dabur, Marico, Gcpl, Jyothy Labs, Emami, Britannia.

Regards
Ranvir Dehal

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While I’m trying to analyze further, I find that the company’s Fixed Assets are reducing, while during the same period EBIT has been growing. I cannot understand how to make sense of it.

Maggi Crisis Year
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EBIT 547 704 865 1028 1273 1541 1830 2008 2112 1161 1899 2181 2725
Fixed Assets 542 602 753 896 1,013 1,576 3,204 3,369 3,177 2,898 2,730 2,616 2,511
Ro FA 100.92% 116.94% 114.87% 114.73% 125.67% 97.78% 57.12% 59.60% 66.48% 40.06% 69.56% 83.37% 108.52%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EBIT 704 865 1028 1273 1541 1830 2008 2112 1161 1899 2181 2725
Avg. Fixed Assets 572 677.5 824.5 954.5 1294.5 2390 3286.5 3273 3037.5 2814 2673 2563.5
EBIT Growth (YoY) 28.70% 22.87% 18.84% 23.83% 21.05% 18.75% 9.73% 5.18% -45.03% 63.57% 14.85% 24.94%
Assets Growth 11.07% 25.08% 18.99% 13.06% 55.58% 103.30% 5.15% -5.70% -8.78% -5.80% -4.18% -4.01%
(ignoring the Maggi Crisis)
EBIT Growth 28.70% 22.87% 18.84% 23.83% 21.05% 18.75% 9.73% 5.18% -10.09% 14.85% 24.94%
FA growth 16.76% 19.67% 20.07% 25.22% 71.15% 17.35% 22.35% -7.52% -14.07% -4.18% -4.01%
EBIT Growth - FA Growth 11.94% 3.20% -1.23% -1.38% -50.10% 1.41% -12.62% 12.70% 0 3.98% 19.03% 28.96%

One way to understand this is, the company is able to produce more returns with a lesser amount of assets. (Implying either more realizations or operational efficiency). But what can we infer about the future prospects of the company?

  1. Does Net negative CapEx (CapEx - Depreciation < 0) implies that in the future Company has to incur more CapEx to maintain the same output?
  2. What metrics do we have to look at, to understand whether the company is becoming more operationally efficient or the EBIT growth is just due to more realizations?

@dineshssairam, @phreakv6 is this the correct way to analyze? Help from the experts on this board is highly appreciated.

No. Negative Capex implies that the company does not need those additional assets to generate more revenue. So, it is a positive. But I wouldn’t read too much into it. Most FMCG companies have near-zero or very low Capex. It’s in the nature of the industry itself. That’s part of the reason why they quote at high P/Es.

Capex generates Sales. It has nothing to do with Profits directly. In fact, Capex is a charge on Profits as far as Value is concerned. I generally look at Capital Turnover to judge a company’s efficiency (Both FMCG and Non-FMCG). For Nestle, it would be like this:

image

The drastic drop in 2011 is because they took out a massive loan, but either did not have to or did not employ it properly. So, a shorter period look would give us this:

image

In conclusion, I’d say Nestle’s efficiency in employing capital has indeed increase in the recent past, but the question of why they had to compromise their financial position to a large extent in 2011 remains.

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On further digging, it looks like the loan was taken from Nestle (The parent company):

The 2011 Presentation of Nestle India claims that this was for a Capex:

image

The Balance Sheet also supports this statement:

image

But as we saw above, this additional Capex was either unnecessary or very inefficient in improving Revenues. If I didn’t know any better, I’d say Nestle Global simply parked its excess funds in the Indian subsidiary, thereby improving Nestle Global’s financial position and denting the Indian subsidiary’s financial position. If someone had been a shareholder in Nestle back then, they might have a better POV.

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Thanks a lot for explaining in detail.

Though I couldn’t find the exact segment-wise Capex operations taken by the company, it appears that company is not able to fully utilize the capacity. From their July 2013 Analyst presentation

Especially in the Chocolate & Confectionery segment, they have launched Alpino, a premium chocolate with huge expectations. But after initial traction, they failed to get any reasonable sales. In the low-margin products, they withdrew from Eclairs in 1QCY14, but re-entered into into it a couple of quarters later (may be because they are unable to expand their portfolio in premium chocolates).
From FY14 to 17, their revenues from chocolates segment were flatish.

Looks like typical media scaremongering. This action will actually bring the case to a logical closure which is presently at a ‘ban stayed’ status. SC has said the CFTRI report will form the basis of proceedings before NCDRC, and the CFTRI report has already cleared Nestle.

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Pardon my ignorance but I have a basic question- Is infant food items revenue(Nan-pro,Lactogen,Cerelac etc) also included in overall Nestle India revenue?
While going thru Nestle India website, I did not find mention of any of the infact foods in their product list, thus got slightly confused.
If it is 48% pie, then it should have been mentioned in the top of product category?

1 Like

An analysis I did sometime back. Pasting it.

FMCG categories

Broad FMCG categories include Cigarette, Food and beverages, home and personal care, alcohol.

It can be categorized as

Nestle

Product Situation Analysis

New Vitamin D milk helps create additional margins to an already high margin product. Having chocolate as a portfolio, Nestle had not done enough to grow them over the years. They have lagged behind Cadburys and had not experimented with variants. However this seems to be changing in the last few years after Maggie was hit hard. Product diversification has been a focus after the maggie issue. Variants of Kitkat and Milybar have emerged.

Nanpro Excella has 30% higher price than Nanpro. Discounts are very rare for these products.

Introduction of breakfast cereal (Nestle NesPlus) has helped Nestle expand to a segment once dominated by Kellogs. We have seen that a developed market like USA has successfully accepted multiple brands in this segment. If we look at the general review of a product like this, it is clear that people compare it to Kellogs and finally buy Nestle for the sake of having a healthy breakfast. Hence the brand has been synonymous for health and nutrition.

Nestle has also entered maternity nutrition segment which was new to a market like India. Thanks to GSK pharma and the Horlicks brand, there is enough awareness to stay healthy during maternity. Nestle Baby and Me maternal nutrition supplement has been quite successful.

Nestle Resource Opti is another high margin product that has capability to become a household name like Horlicks.

Premature babies have become common due to various lifestyle diseases that have cropped up in the current century. A product such as Nestle Pre Nan is currently imported and sold in India. With manufacturing in India, the margins must increase when Nestle has enough volumes to start domestic production.

Maggie masala range and the expansion of Maggie noodle ranges has been helping Nestle manage competition. The fortification of the brand ‘Maggie’ is paramount to Nestle and they have done well in the last 3 years.

Competitive Situation Analysis

ITC has been using the maggie debacle effectively. However ITC does not have pricing power as seen in their FMCG overall margins. The restoration of Maggie brand was seen in the last few years. ITC may be able to poach price sensitive consumers. However with Nestle matching price and being aggressive, they have ensured to keep Maggie a domestic brand as always. The sheer variants of Maggie makes it grab more shelf space and sales.

A new segment that Nestle is trying to expand to is the health food business that is dominated by players like Horlicks, Complan, etc. As we could see from GSK’s sales, it is clearly saturated and hence there is scope to crack this segment.

Nestle has presence in cereals market in Europe. However it was launched only in 2018 in India. It has been growing slowly and could be a major revenue source for Nestle. The brand has aggressively expanded the variants and has a very strong portfolio. Kellogs has been enjoying a dominant position for years and this could be changed with 2 to 3 additional players. The capex addition in Goa and Gujarat has been a classic indication of this trend for Nestle.

Economical Situation Analysis

The growth in India’s urban breakfast market seems to be on an uptrend. Kelloggs even reported that India and Korea led the Asia pack. It has been clocking double digit growth for over 5 years.

Technological situational Analysis

Modern production lines and economies of scale is needed for new product lines like cereals. Nestle’s parent has wide experience to achieve this due to their successful business in Europe.

Demographic situation analysis

While most products are focussed for urban dwellers, rural India could start embracing certain products such as baby food and maternity supplements. Children food and drinks could also follow this pattern. The cereal business may take time to penetrate rural India but the growth in urban cities has been very brisk if we look at the growth of Kelloggs.

Social and cultural situation analysis

The shift of consuming quick food such as Maggie and Cereals have been a wide spread trend for several years. This cultural trend is fast penetrating Tier 2 and 3 cities too. The new products such as Cereals could be on a multi decade growth trend, considering the addiction of sugar and lack of time for the modern family.

Political and legal situation analysis

Impact from Government, politics plays very little or no role unless it adds dietary restriction. There are no dramatic changes to accepted food standards in the last several decades. Low sugar and fat is usually the industry trend and Nestle is on the path to reduce them as needed.

Environmental situation analysis

Cereal market:

How big is the market? If Kellogg’s has a large market, it shows that the market is attractive for a new entrant like Nestle.

Kellogg’s has a big chunk of the market. How will Nestle launch new products? Will they attack them with a competing product or can they launch a unique product like they did in Europe? It has been shown that Kellogg’s was not able to counter a unique product very easily. Is there one such product with Nestle Cereals?

Is there a risk of substitutes? Breakfast bars?

No impact from Government. Hence this makes the business run without surprises.

When competing with Kelloggs, How can Nestle get economies of scale?

Gaining market using a large chain like D-Mart may be helpful. Have they done that? For example, Parle has exclusive deal with D-Mart to drive sales using the discount model. Ecommerce entry through Amazon has been initiated.

How will people change from eating traditional breakfast to start consuming cereals? Is there an urban influence to eat breakfast with minimal effort and fuss? Kelloggs in 2017 reported that their growth in Cereals was led by India and Korea.

Supply chain situation analysis

FMCG thrives on a good SCM. Nestle has shown to expand very well within urban areas with their efficient distribution. How they can emulate HUL to enter rural areas need to be closely watched.

SWOT

Strength:

Promoting brands takes a lot of time. Even difficult is to set up distribution. Setting up rural distribution network is an ongoing process. Pricing power is iminent for baby products.

Weakness:

The weakness of Nestle was exposed in 2015 when Maggie was termed to contain lead. The negative publicity was a blow as the product mix of Nestle was very much dependent on Maggie. The branding strategies seems to be poor in terms of naming brands. Nesplus, for example seems to be not a catchy brand name for an important product series. When it was tested with brand recall, it fared very badly. The quality of creating brands has been very well executed by ITC and Nestle may need to take some cues from them.

Opportunities:

Ceregrow, a new product with higher margin was added nationwide in 2017. Nan pro and cerelac are already leading brands owned by Nestle. The young indians like to pay more for products claimed as healthy. Nestle has been using this card for a long time and has utilized it successfully. However with the negative perception of Maggie, Nestle saw a stagnation in sales. This negative perception is temporary as these events vanish from public discussion in a short period of few years. We have seen that in the sales chart and growth rates as shown below.

The aspiration to consume baby products has been increasing in rural india. Over 70% of India’s population is in rural India and they have very limited exposure to FMCG even with the wide distribution. However finding a Nestle UHT milk or Maggie noodles is now possible in most Tier 2 and 3 cities. The apparent perception of Nestle taking a beating is only temporary as we have seen similar stories get buried for other products. Dairy milk is a classic example to illustrate the case.

Looking at market size is very important to understand the future growth. The annual revenue of Nestle India is Rs. 10,000 crores ($1359 million). Parent has a revenue of 8979 crores CHF ($89612 million). This is 1.5% of Nestle SA ‘ revenue. India has 17% of world population and the product mix of Nestle is in small price segments. This clearly shows that the saturation point is very far away. Nestle is one of the best way to play the population game and exploit the growth rate in population and disposable income.

Another way to look at consumption is to look at how it has changed in the past. According to HBR, the consumption became 13X between 1960 and 2012.

HBR - Indian incomes are growing at about the same rate, but from a much smaller starting base. And so what we would expect to see in India, which is still largely a rural country– a rural agrarian country– 70% of the population living on the farm. We would expect to see lifetime consumption increasing for the baby born in 1960 from $14,000 to $184,000, an increase of 13x.

Nestle used to have a Net fixed asset turnover of 5 to 6 in past years. It declined to 2 to 3 in 2012 and has been recovering since. The OPM has been very stable at 20% over a long time. However sales growth has declined and there is a very good macro indication of improvement. The last 24 months of sales data shows recovery and it is possible to see sustained recovery and growth if the new product diversification strategy and brand strengthening exercise takes shape. The initial sales decline happened in 2015 after the issue with Maggie. Sales fell to 8k crores from sustained 9k crores in 2013 and 2014. The sales recovered to 10k Crore in 2017 and has been sustained at this level in 2018.

To understand the opportunity of the cereal products and their opportunity size, we can look at history. Kellogs was a common brand in the EU in 1990s. Nestle was new to this product line and entered in to a JV with General Mills (sold Cheerios in USA). This product line was an important revenue stream for Nestle even today. How they captured the market from Kellogs could be very useful to analyze the opportunity in India. Nestle never launched a predictable product to compete with Kellogs. Each market had a local taste and Nestle was efficient to target that. For example, Nestle never launched Corn flakes in Europe. They also used their strength in other business by launching Nesquik cereal to mirror their Nesquik drink. Kellogs had no such drink and was unable to compete with Nestle.

Threat:

Maggie issue in 2015 was an important event which has changed how the company operates. The product mix is now updated to decentralize brands.

The net fixed asset turns have been improving in the last few years (even though reporting standard changes have made it difficult to compare).

Threat from suppliers : Suppliers don’t have bargaining power. Hence the threat is very minimal due to raw material pricing.

Threat from house brands: High risk for generic products and weak product lines. Example: Cornflakes could be a weak link while a granola caramel crackle could be relatively safer.

Issues analysis

The issue of branding cereal has to be addressed with proper commercials and distribution. Baby food has been a prime revenue generator with higher margins. However the seamless graduation from Nan Pro to Cerelac, and then to Ceregrow has not been executed very well. The use of careful branding would have prevented this issue. We need to see how Nestle could make an infant start moving from Nan Pro to Ceregrow when they age.

References

Nestle:

  1. Nestle AR - https://www.nestle.in/investors/stockandfinancials/documents/annual_report/nestle-india-annual-report-2017.pdf
  2. HBR - India growth - https://hbr.org/2012/09/china-and-india-are-an-opportu
  3. Nestle Cereal growth in EU - https://www.uhu.es/45122/temas/P&SC/BreakfastCerealMarket_ATTACKvsDEFENSE_P&SC.pdf

Disclosure: Adding it to my core portfolio.

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Great writeup. However I would like to know your valuation analysis on it. It seems very expensive.
Arent you worried about a big derating coupled with time correction to an extent??
Please tell us about your view on valuations.
Will you buying in one shot or in an SIP manner ?

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I left out the valuations as this is something that people prefer doing it themselves based on facts. The margins have been very stable. So if I assume it to be at the same level, I see EPS at 350 (worst case) to 660 (if things work out relatively) in the next 10 years. If new products really work out, another 200 rupees can get added. The risk is that they are trying too hard after the Maggi issue and not spending time to create a successful long lasting product. So they must be somewhere between 350 and 800 EPS in the next 10 years.

I will definitely buy for the next 2 to 3 years and it will be SIP based on price. I will start with a small position now and based on the price/ performance of business, I will keep adding. There is very little margin of safety at this price for me to buy in bulk.

Very detailed analysis and agree to your valuation comment of to each his own metric and comfort level. Wanted to ask you do you see any risk from nestle being an inherent foreign parent company? Can anything adverse happen in nestle or hul etc. From any decisions by their foreign parent which May not be in favour o their indian subsidiary? What are the controls, if any?

As far as I can see, parent is not much interested in India due to relatively smaller size of it’s operation in India. To give an example, Maruti and Suzuki had a difficult relationship in past decade. Suzuki was very stingy and was not willing to invest and innovate for making progress in India. But that changed when we became their No 2 market, and now the largest market for Suzuki. I expect similar pattern for Nestle. Right now we have seen them abuse capital allocation by taking unwanted loans and not doing the right capital allocation. That will eventually change. We have seen that in Whirpool where money is parked for very low returns in parent company debt which is risky. The managers in India are very weak but that will change when India becomes a bread winner for the parent. When that happens, we will see what Maruti did from 2013 replicate in Nestle. We have already seen Nestle pulling their socks after Maggi issue. Indian operation is under the scanner and that clearly shows in their focus to launch more products and increase sales (at the expense of margin as per management).

6 Likes

That is likely to happen in the future. It’s a possibility.

But, as of now the stock is demanding a PE 63 for sales growth of 4% in five years. And 7% in last three.

Do you find the share price has too much expectation grilled in.?

Past growth rates don’t determine stock price, what matters is the future growth. The reason for high PE could be expected acceleration in earning or understatement of past earning/growth. It may also be because of high visibility of earning into the future, or a combination of various such factors. Only a deeper study of the business may reveal the reasons for high PE. But we should not reject a stock, on which market seems to betting, just because its past growth rates have been unexciting.

Disc: No holding in Nestle

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You have to adjust for the maggi issue before taking the sales growth numbers into account.

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From a layman’s point of view, it is a stock which has not performed in the recent past, (for whatever reason be it lack of interest of the parent or due to sluggish Indian economy as it is adjusting to GST norms, demon, eway bill issues, volatility of business due to election year etc…)

It becomes a very risky investment for a layman, since FMCG is not his circle of competence.

Often time, market participants, funds managers, too do not fully understand the future. They simply give a knee-jerk response to the inflow of money, by parking it in “safe-sounding” sectors and companies.

It is like, if an investment in Nestle fails, then its markets fault, the investor should have read the “offer document” and its fine print; but if an investment in an unknown company fails then it is the fund managers fault.