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Nestle India: Research meet extracts

Dec 1, 2009

We recently attended an research meet hosted by Nestle India wherein the management discussed its future business plans and its 9mCY09 results. Results overview

The company's topline grew by 17% YoY during 9mCY09. The results were positively affected by carry over pricing, increase in net realisation in domestic sales, export incentives and gain from foreign exchange. The 9-month performance, however, also had a negative impact of lower exports, rationalisation of portfolio, slow down in out of home segment, loss of key accounts and higher provision for retirement benefits.

Domestic sales increased by 19% YoY while domestic volumes increased by 13% YoY. Exports fell by 6.6% in value terms while export volumes fell by 8.9% YoY.

During the 9 month period, the company took price hikes ahead of the curve, in anticipation of rising costs. This has resulted in higher realisation for Nestle as well as margin expansion. Domestically, the company derives 25% of its sales from tier 1 towns, 17% from tier 2 towns, 7% from tier 3 towns and 54% from tier 4 towns.

Pressure on export sales was due to a slowdown in demand from Russia as well as a negative impact of the Chinese adulterated milk scandal. The company is seeing a fall in the rate of incremental decline in exports and believes that its export segment should stabilise soon.

For Nestle, South Asia was the biggest export market in 9mCY09 with 42% of its export revenue derived from this region. The beverage segment was the largest product contributor with a 53% share of export revenue.

Amongst raw material, Nestle is concerned about milk and sugar. The price of fresh milk has gone up by about 9% YoY while sugar prices have increased by 45% YoY for the company. While Nestle took price hikes to negate the effect of these raw materials, the hike was not sufficient to completely neutralise the rise in costs. The fastest growing segment for the company has been processed foods. This segment witnessed a sales growth of 25% YoY and a volume growth of 20% YoY. The growth was a result of the successful advertisement campaign “Me & Meri Maggie”. Nestle believes that this campaign would also help support incremental growth next year.

New Products

Nestlé’s new product launches are largely in the processed food category that include pasta, soups and ready to cook spices. Its newly launched pasta is based on a health platform and low preparation time. Nestle believes it will open up a whole new segment for the company and that it will not be in direct competition with Maggie noodles.

The company also has low priced stock keeping units (sku) which are sold in rural markets. However, as of now the company does not have plans to shift its focus to rural markets.

What to expect?

At a price of Rs. 2566 the stock is trading at 25 times our CY11 estimated earnings. While we believe that long term prospects of Nestle remain undiluted, the current valuations of the stock warrant caution on the part of investors.

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