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Nestle India – In a transition phase - Views on News from Equitymaster
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  • Jun 13, 2000

    Nestle India – In a transition phase

    India’s second largest food product company Nestle India is in a transformation phase by restructuring its business operations. The company is launching several new products to remain in the competitive Indian food market.

    Rising coffee production
    Indian coffee production in 2000-01 is expected to expand by nearly 2% to 4.9 m bags. Favourable weather and timely rains were expected to contribute to this record coffee crop, comprising a total of 1.9 m bag of ‘arabica’ and 3 m bags of ‘robusta’. As a result exports of coffee is forecasted to go up to 400,000 bags from 310,000 bags in the previous year (increase of nearly 29%).

    World’s coffee production in 2000-01 is forecasted at a record 108.7 m bags up by 2% from the last year’s level according to Coffee Update issued by the US Department of Agriculture. Globally total exports of coffee during 2000-01 are expected at 83.5-m bags from 83.8-m bags in the previous year.

    This is a good signal for Nestle, which exports nearly 14% of its total revenue. In the FY99, Nestle’s topline growth was adversely affected due to decline in the coffee exports by 38%. In the domestic chocolate market the company is facing tough competition from Cadbury. Nestle as a part of its new strategies is trying to cut costs, focussing on treasury management, operational efficiencies, increasing consumer base by introducing new products and developing new price points for different products.

    Restructuring to benefit
    Nestle is looking at greater synergies in its operations in the entire south Asian region. The company sees different cost operators for its different products. For example Sri Lanka has substantial capacities of the white malt product Nestamalt (not yet launched in India by Nestle). The product could be produced in Sri Lanka to reduce the cost of operation and supplied for the Indian market. In the same way, Milo one of the largest selling brown malted product world wide could be sold in Sri Lankan market (instead of investing in new capacities in that country). The company also plans to tap the eastern market of India with the products like condensed milk and instant noodles through its plant in Bangladesh.

    During the current year, Nestle has also launched its plain milk, which is well accepted in the market. In future the company’s main focus area would be milk and water. The company is expected to launch its brand in water by the end of the year. The re-shaping of the business is likely to affect positively to Nestle India’s topline growth in the current year.

    At the current market price of Rs 366, Nestle is trading at a P/E of 33 times its FY99 earnings on a market cap to sales ration of 2.3 times. The company enjoys comparatively lower valuations than Cadbury.



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