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Nestle Vs Nestle
Sep 15, 2008

Nestle India is a leading processed foods and beverages players in India. It is the market leader in most of the product categories it operates in. New product launches, thrust on health based products, rising income and low per capita consumption provides strong growth visibility. It is a play on the urban story. In this article we compare it to its parent company. About Nestle (parent)
Nestle with headquarters in Vevey, Switzerland was founded in 1866 by Henri Nestle. Today it is the world's leading nutrition, health and wellness company. It employs around 0.27 m people and has factories or operations in 130 countries across the world. It manufactures a range of over 10,000 different products

Nestle (global)
(INR m) CY04 CY05 CY06 CY07 CAGR
Net Sales 3,379,131 3,635,489 3,928,474 4,291,325 8.3%
EBITDA 465,114 502,660 564,106 642,629 11.4%
Operating margin % 13.8% 13.8% 14.4% 15.0%  
Net profit after Tax(Loss) 264,178 319,001 366,960 424,895 17.2%
Net profit margin % 7.8% 8.8% 9.3% 9.9%  

Nestle India
Nestle India is the Indian arm of Nestle SA, which holds a 62% stake in the company. Nestlé’s relationship with India dates back to 1912, when it began trading as The Nestlé Anglo-Swiss Condensed Milk Company (Export) Limited, importing and selling finished products in the Indian market. It commissioned its first factory in 1961 at Moga, Punjab, where the Government wanted Nestlé to develop the milk economy, and currently has 7 factories in India. Though its main operations are in India, it exports to South Africa, Russia, US and Asian regions.

Nestle India
(INR m) CY04 CY05 CY06 CY07 CAGR
Net Sales 22,276 24,769 28,160 35,043 16.3%
EBITDA 4510 5,221 5,385 6,963 15.6%
Operating margin % 20.2% 21.1% 19.1% 19.9%  
Net profit after Tax(Loss) 2,519 3,096 3,151 4,139 18.0%
Net profit margin % 11.3% 12.5% 11.2% 11.8%  

As can be seen from the above tables, Nestle’s turnover is less than 1% of that of its parent, despite India being the second most populated country in the world. This is mainly due to the low penetration and low per capita consumption in India than the world average. The contribution to the bottomline is also around 1%.

In terms of growth Nestle India has been growing faster than the parent. While lower base is one of the reasons, rising income, changing lifestyle and increasing urbanisation has led to higher demand of Nestlé’s product. Even the margins have been better than the parent. While the domestic company has presence in beverages, milk products, prepared dishes and chocolates segments, the parent in addition to the above have products in ice cream, pet care, performance and healthcare nutrition. Further, more brands are also available in the segments as compared to the domestic subsidiary.

Nestle India has strong support from its parent company of the same name and which today, is the world's biggest food and beverage company and has a presence in almost every country. The parent is bullish on the Indian economy and has indicated plans of launching new products in the country. The management foresees huge growth potential, as consumption demand is increasing and consumers are also more willing to experiment with new products. With health and wellness getting higher priority, demand for functional foods would go up. The company has target of 20% of its parent’s product portfolio renovation each year. Nestle is slowly building on its presence in the Functional Foods segment. Nestle has test launched NIDO (milk powder for children above two years), Milkmaid Funshake (flavored milk in five variants), Nesvita Multigrain breakfast cereal, Nesvita Pro Heart milk, Nesvita Probiotic Dahi (curd), rice noodles (in three flavours to suit regional preferences), Munch Pop Chocs (snack product), Tangeez (candy) and Kit Kat Mini among others.

ROA CY04 CY05 CY06 CY07
Nestle 7.8% 7.9% 9.3% 9.5%
Nestle (India) 26.6% 29.4% 26.8% 29.4%
RONW        
Nestle 17.1% 16.0% 18.0% 20.4%
Nestle (India) 78.9% 87.4% 81.0% 98.9%

Nestle India also has access to its parent’s investments (global expenditure was Rs 65 bn in 2007) in research and development and advanced technology for foods and beverages. While Nestle India pays a fee (which has ranged between 3% to 3.5% of its annual net sales) in return for the access, it has still reported a healthy EBIDTA margin of 20% in the last three years.

In terms of return ratios, the parent no doubt is efficient, generating returns of average 18% to shareholders over the last 4 years. The RONW has infact improved from 17% to 20% in CY07. However, the domestic company is far more efficient. The reason for the same could be attributed to the wide presence of the parent across different geographies. Further, the developed markets are matured and growing at a lower rate. Also, it is foraying into emerging markets, which calls for infusion of funds.

Valuations
Globally, the parent's product portfolio caters to all age groups, from the infant to the elderly, across nutritional, beverage, culinary and chocolate product segments. This is indicative of depth of the parent's portfolio, which can potentially be tapped by Nestle India to target the Indian markets. Nuclearisation of families, growing middle class, rising disposable incomes, changing lifestyles and increasing acceptance of processed foods are some of the key positive factors, which should provide further opportunities for companies like Nestle. The low per capita consumption in many categories also indicates huge potential for growth. Valued at Rs 4,600 bn in 2004, the food-processing sector is expected to touch Rs 13,500 bn by 2015. With 200 m people expected to shift to processed and packaged food by 2010, this presents a huge opportunity for makers of branded products like Nestle.

Though Nestle, because of its presence in a growing market and expectations with regards to better performance in future, trades at a premium to the parent where the high growth in developing economies gets offset by a rather subdued growth in European nations and the US, which are matured economies, at the current juncture, the valuations are stretched.

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