TECHNO SHARES & STOCKS LTD

INDIA RESEARCH
FMCG
ACCUMULATE
23rd March 2009

NESTLE INDIA LTD. (NESTLE)

Surfing smoothly on health plank

Shivani Mehra

6633 8900 EXT. 158

shivani.mehra@technogroup.co.in

Vishal Shah

6633 8900 EXT. 156

vishal.shah@technogroup.co.in

INTIATING COVERAGE:

NESTLE INDIA LTD. (NESTLE)

ACCUMULATE
Date

23rd March 2009

CMP

INR 1,520

52 week High / Low

INR 1,880 / 1,220

Equity Cap (current)

INR 96.42cr

Face Value

INR 10

Nestle India is well know for its brands like Maggie in the food
segment, Cerelac in the infant foods segment & Milkmaid in the
condensed milk space. With strong support from its parent Nestle
S.A., Nestle India has created a niche through its product offerings
in India. The strong brand equity has enabled it to attain leadership
position in the respective categories. The emergence of urban and
semi-urban areas on the Indian landscape spells a secular long term
positive for the pro-urban product portfolio built & nurtured by
Nestle for last many decades.

Mkt. Capitalization

INR 14,658.25 cr

KEY RATIONALE

Avg. Daily Vol. (12 M)

34,743

BSE SENSEX

8,966.68

NSE - NIFTY

2,807.05

Bloomberg Code

NEST IN

Build-up of niche product portfolio with focus on health &

nutrition: The build up of the product portfolio & brand
extension based on the health & nutrition platform aptly places
Nestle to capitalize on the growing wellness trend. The Maggi
rice noodles, probiotic dahi, Cerevita protein & fruit cereal, low
fat milk reflects Nestles ideology to create health & wellness
products.

BSE Code

500790

Prepared cooking dishes (PCD) & confectionaries leading

the growth: The convenience foods & chocolates have grown at
2 year CAGR of 22.4% & 16.7% respectively. The PCD &
chocolates have registered strong YOY volume growth of 2728% & 19-20% resp. even during testing times in CY08.

SHAREHOLDING PATTERN @ 31-12-08

Promoters

61.9%

FII & DFI

19.7%

Public & Others

18.4%

The introduction of nutritional variants and availability at

attractive price points has enhanced penetration & spurred the
convenience foods & confectionary segment growth.

3-MTS

6-MTS

1-YR

NESTLE

12%

-9%

8%

Nifty

-9%

-31%

-38%

Sensex

-11%

-33%

-39%

BRIEF
2007A
FINANCIALS
Net Sales

2008A

2009E

4324.2

4943.2

5513.5

Sales
growth

24%

24%

14%

12%

EBITDA

619.7

832.8

976.3

1102.7

17.7%

19.3%

19.8%

20.0%

PAT

413.8

534.1

661.2

759.9

EPS

42.9

55.4

68.6

78.8

P/E (x)

21.8

27.0

22.2

19.3

102.5% 109.1% 103.7%

96.8%

RONW(%)

Ability to pass on the cost increases: Inspite of the steep

rise in the operating costs in CY08, the niche product offerings
have aided Nestle not only to grow volumes but also in
maintaining their margins (19-20%). We believe, the strong
product positioning will help Nestle maintain the margins (if not
increase) going forward.

Savings in tax rate: The new plant at Uttaranchal mainly for

convenience foods has started contributing to the production as
evidenced by the drop in tax rates from 34% in CY07 to 30% in
CY08. We believe that with the new plants increasing
contribution to total production, the effective tax rates will
reduce to 26-28% levels in CY09 & CY10.

Increasing urbanization of the Indian landscape: Urban &

semi-urban households are expected to increase at ~2.5-2.8%
CAGR over the next 5 years. We believe that the increasing
urbanization, rise in working women population & the growing
health consciousness augurs well for Nestles pro-urban product
lines.

VALUATION: Nestle is trading at substantial premium to its

peers like HUL, GSK Consumer & Colgate even on TTM basis at
the CMP of INR 1,520. The stock trades at 22.2x its CY09E and
19.3x CY10E EPS of INR 68.6 and INR 78.8 respectively. The
product positioning & increasing customer base provides sound
growth prospects over the long term.
We recommend
ACCUMULATE on dips for the stock with a price objective
of 15-17% upside over a period of 1-year.

KEY RISKS TO OUR CALL:

2010E

3500.7

EBITDAM

*E Estimated, A Audited

Nestle India Ltd. (NESTLE)

Fluctuations in key raw material prices.

Severe downturn in Indian economy.

23rd March 2009

KEY RATIONALE

Building up a portfolio with focus on health & nutrition

factor
There is a new wave engulfing the Indian FMCG industry
Health Consciousness. Various industries such as food,
hospitality, consumer durables (refrigerators) etc. are adapting
the health, nutrition, safety and wellness platform so as to
have a competitive edge by giving the consumer a healthy
alternative.

The introduction of healthy alternatives

across categories by various FMCG
players stands testimony to the growing
wellness trend.

Recently, the Nielsen Company conducted a study on global

food labeling trends. It was an internet survey on Food
Labeling and Nutrition conducted across 51 countries.
Statistics revealed that in 2005, 32% Indians (mainly urban &
semi-urban) checked the food nutrition information on the
package as compared to 71% in 2008 (but only 59% of them
understood these labels). India tops the Asia Pacific region in
understanding of food labels. This re-iterates our stance of
growing health consciousness in India.
The introduction of healthy alternatives like Saffola by Marico
in the edible oil space, fibre enriched biscuits by Britannia &
ITC, iodized salt by Tata, fortified atta by HUL, Women Horlicks
by GSK, calcium enriched milk by Amul & others stand
testimony to the growing wellness trend.

120

100
80

20

37

37
63

60
40

When you are buying packaged food,

when would you check the Nutritional
informationon the package?-Always

Break-up of Population Reading the

Labels and Understanding it

73

79

27

66

25

23
19

59
33

12

0
India

Malasia
Mostly

Japan

In part

23

29

China

Asia
Pacific

Not at all

Product realization to come down by

~10% in CY09

India

Malasia

Japan

China

Asia
Pacific

Nestle has been an early follower of the nutrition ideology. It

identified the trends of growing urbanization, rising income
levels & increasing proportion of working women and
enhanced its product portfolio based on the convenience and
nutrition theme.
Nestle has through a combination of brand leveraging and
emphasis on the nutrition theme gained the confidence of the
working women population. Assured quality, quick to make,
hassle free and on top of that a healthy substitute to a home
cooked meal are the attributes that have augured well for all
Nestles nutrition based food and beverage products.

Existing Product Brands

Nutritive Brand Extensions

Maggi Instant Noodles

Maggi Dal Atta Noodles & Maggi Rice Noodles

Maggi Soup
Nestle Milk

Maggi Healthy Soups

Nestle Slim Milk

Nestle India Ltd. (NESTLE)

23rd March 2009

Niche Offerings
Nestles product offerings have gained in popularity because of
four reasons - convenience, quality, taste and niche
proposition. Through this combination Nestle has created
leadership position in the infant food, instant coffee, noodles,
condensed milk and chocolate wafer segment. Its brands have
become synonymous with the product itself. Its strategy for
product entry has always been with the aim of creating a niche
for itself & hence managed to create and maintain market
leadership in its product offerings.
Survival in the functional foods business requires robust R&D
capabilities enabling a company to innovate and develop new
product lines on the health and nutrition platform.

R&D as a %age of sales

0.44%
0.38%
0.30%

0.5%
0.4%
0.3%

0.22%

0.2%
0.1%

Nestle enjoys an R&D edge over its peers due to support from
its parent company. Nestls clear focus on health & nutrition
has enabled it to stay ahead of its peers and offer more
innovative products on the wellness platform.

0.21%

0.15%
CY07

CY06

CY05

CY04

CY03

CY02

0.0%

Ability to pass on cost increases

Two Year CAGR in Realisations
12.50%

11.20%

During H1CY08 FMCG players world over were faced with

rising agri-commodity prices. Inflation was the hanging over
the world and Nestle was forced to take price hikes across all
segments to account for these input cost pressures. Inspite of
the steep rise in the operating costs in H1CY08, the niche
product offerings have aided Nestle to grow not only in
volumes but also in maintaining their margins (20%). We
believe, the strong product positioning will help Nestle
maintain the margins (if not increase) going forward.

4.20%

Beverages

Milk
Products
&
Mutrition

Chocolates

Prepared
Dishes &
Cooking

2%

RESULTS TABLE
CY08
Net Sales
PBIDT
PBIDTM (%)
Interest
Depreciation

CY07

4,324.24

(INR in crs)
VAR.

3,500.65

23.53%

832.8

619.7

34.38%

19.3%

19.8%

1.6

0.9

92.94%

92.4

74.7

23.58%

PBT

772.8

628.6

22.94%

Tax

238.7

214.8

11.15%

30.9%

34.2%

-9.60%

534.1

413.8

29.07%

16.69*

534.1

430.5

24.06%

55.4

44.6

24.06%

Tax rates
PAT
Extraordinary Ex
Adj. PAT
EPS

Nestles focus is on overall profitable growth for which it

adopts a mix of both volume and realization growth strategies
while considering all external factors influencing such
decisions. In the 1990s when the agri-commodities were in a
deflationary cycle Nestle emphasized on volumes growth.

Prices of vegetable oils have eased slightly in H2CY08 while

prices of other key inputs like wheat flour, sugar and milk have
increased marginally. Nestle has witnessed tremendous cost
pressure but still been able to maintain 19%+ margins for the
CY08. Topline growth at 24%, was a mix of realization growth
and volume growth.
Nestle enjoys pricing power as it is in a leadership position
across its product offerings. Apart from pricing Nestle has
been able to improve margins across all segments even in
such adverse conditions through cost efficiency programs,
fixed cost leveraging as it grows and product mix.
We believe that these cost pressures were temporary for and
that Nestle will be able to maintain 19-20% margins going
forward.

*Includes one time expense for VRS INR 75.73 crs. &
INR 59.04 crs of income on account of write back of a
provision for contingency for a litigation.

Nestle India Ltd. (NESTLE)

23rd March 2009

Prepared cooking
leading the growth

dishes

(PCD)

&

confectionaries

The convenience foods & chocolates have grown at 2 year

CAGR of 22.4% & 16.7% respectively. The PCD & chocolates
have registered strong YOY volume growth of 27-28% & 1920% resp. even during testing times in CY08.
The introduction of nutritional variants and availability at
attractive price points has enhanced penetration & spurred the
convenience foods & confectionary segment growth.
Strategic focus on the Popularly Positioned Products
(PPP) segment
PRICE
INR 10
INR 5

Nestles PPP segment is aimed at targeting new

consumers who are willing to transcend to
branded products as income levels increase. We
believe that the demand for products in this
category to be less price elastic and income
elastic.

PRODUCTS/BRANDS
Maggi Noodles, Kit Kat, Barone, Milkybar,
Nescafe Sunrise, Nescafe Classic,
Everyday
Maggi Noodles, KitKat, Milkybar,
Everyday, Munch, Nescafe Sunrise, Polo

INR 2

Nescafe Sunrise, KitKat, Munch, Milkybar,

Barone, Polo

INR 1

Nescafe Classic, Milkybar, clairs

INR 0.50

clairs, Polo, Tang Eez

PRICE POINT

16%

10%

17%

INR 0.5

PRODUCT CATEGORY

7%

53%

INR 1

INR 2

10%

Milk Products & Nutrition

Growth through PPP

Volumes (' 000MT) / SKUs (Nos.)
Revenues (INR Bn.)

The consumers in this segment are driven by

value for money and hence Nestle is leveraging
on its quality, taste and nutritional content to
popularize its PPP segment. Products in this
segment are priced in the range of INR 0.50 to
INR 10. Approximately 66% of the products in
the PPP segment are from the chocolates
segment.

INR 5

66%

Beverages

Chocolate & Confectionery

PPP ' 03

PPP ' 07

24 / 60

48 / 50

3.3

6.9

Revenues CAGR 2003-2007 %

20%

4%

INR 10

17%

Prepared dishes & cooking aids

Nestle has over the last 4-5 years

rationalized the number of SKUs in this
segment but doubled its volume output.
The contribution of this segment has
increased from 21% in CY03 to 27% in
CY07.

The PPP segment has boosted volumes growth in the

convenience foods & the confectionary segment and has
proved to be a good defensive strategy for Nestle as it has
been able to retain its customers by offering products at
different price levels to meet various customer needs.

Nestle India Ltd. (NESTLE)

23rd March 2009

Increasing urbanization of the Indian landscape

According to the Urban Housing Policy Working Papers 20072012, urban households in India is expected to grow at a
CAGR of ~2.5-2.8% for the next five years. By 2012 Indias
urban cities will be handling ~ 75 mn households with an
average size of 4-5 members per household. This includes Tier
I, Tier II and Tier III cities.

Households (in mn)

75.01
66.3
55.8
40.7

2012P

2007E

These trends augur well for Nestles nutrition based convenient

foods & low fat milk segment. Nestles products are easy to
make & healthy substitutes versus home cooked snacks.
Nestles trusted brand quality has enabled it to create market
leadership in its product offerings and making it a preferred
choice in a mothers shopping list for a healthy snack.

2001

Another trend arising out of growing urbanization is the

increasing proportion of working women in the workforce.

1991

19.1

1981

14.9

1971

29.3

1961

80
70
60
50
40
30
20
10
0

This transition in mindsets supported by the demonstration

effect to a certain extent will augur well for the PPP segment.
Nestles PPP segment is aptly placed to attract new consumers
at the entry level who want to shift to the branded segment.
Apart from this Nestles health and nutrition based product
lines will also benefit from increasing demand from the higher
income groups.

CONCERNS
Fluctuations in key raw material prices
Cost Trends for CY08 over CY07
20.0%

% Increase

16.0%
15.0%

13.4%

10.0%
5.0%

8.1%

8.6%

4.8%

Nestle India Ltd. (NESTLE)

Oils

Sugar

Milk
Powder

Milk

Wheat
Flour

0.0%

Nestles inputs are all agri-based, hence vagaries of

monsoon will impact the companys sourcing and hence
profitability. In H1CY08 the company released its Indexed
cost data, which reflected a YOY increase in cost of all
major inputs as agri-commodity prices hardened. Nestle
was hence forced to take price hikes across segments so
as to maintain profitable growth. CY08 results show that
Nestle has not been able to pass on full cost increase and
margins fell below 20%. Prices of vegetable oils have
eased slightly in H2CY08 while prices of other key inputs
like wheat flour, sugar and milk have increased marginally.
The management is of the view that more price increases
will not be needed if input costs remain stable at this
level. Hence margin expansion is possible if the
management decides not to roll back prices. We believe it
will be able to come back to its historical 19-20%+
margins even if it intends to pass on the benefit of input
costs to consumers going forward.

23rd March 2009

INDUSTRY OVERVIEW
Transformation from food processor to
Health, Wellness and Nutrition
company

Domestic food processing companies are looking for an image

makeover from mere food processors to Health, Wellness and
Nutrition Company. The rising trend of health consciousness in
the domestic urban population and increasing demand for
convenience food arising from the changing lifestyle, has
ushered in a health and nutrition revolution across the Indian
food industry.

Functional foods: scientifically

recognized as having physiological
benefits beyond those of basic
nutrition

By definition functional food is very broad concept

encompassing within its definition every food preparation,
which is scientifically recognized as having physiological
benefits beyond those of basic nutrition. Examples include
margarine-style spreads that contain cholesterol-lowering
plant stanols, and probiotic fermented dairy drinks that
contain friendly bacteria, believed to improve gut health,
soya milks, & functional breakfast cereals.

Indian functional food companies

expected to grow at ~25 -30% on a
small base for the next five years

This broad-based definition of functional foods makes it

difficult to get a consensus estimate of the industry size. A
leading food & beverage data analyzer Just-Food.com had
conducted a study in 2007 on Indias functional foods industry
and estimated revenues from this segment at USD 185 mn for
the year-end. According to their projections this industry is
expected to grow at a CAGR of 40-45% for the next 5 years
and grow in size to USD 1,161mn by 2012.
Functional foods business requires deep understanding of
consumers psyche and high technical expertise to develop the
suitable products. Our interaction with industry participants in
this segment has established that the brands launched in this
segment have been growing at more than 20-25% annually.
They are expected to maintain this growth momentum in the
future due to rising urbanization leading to demand for
convenience food providing at par nutritive value as home
made food.

Nestle India Ltd. (NESTLE)

23rd March 2009

COMPANY BACKGROUND
Leadership position in all core
categories

A 61.85% subsidiary of Nestle S.A of Switzerland, Nestle india

has seven factory locations across the Indian geography.
Nestle operates in 4 segments: milk products & nutrition,
prepared dishes & cooking aids, beverages and chocolates.
Some of its established brands include Maggi, Nescafe,
Lactogen, Kit Kat and Milkmaid.
It enjoys leadership position in its core categories like baby
foods, instant noodles and instant coffee. Nestle has created a
niche for itself through its product offering.

Strategic focus on the health, wellness

and nutrition platform

Nestle focuses on developing products around the nutrition,

health and wellness platform. Strong parental support along
with renovation and innovation in its offerings has enabled
Nestle to create a niche for itself.

Strong brand equity

Over the years Nestle has built strong brand equity. This
strong brand equity has transcended into a strong brand recall
with the consumers and is evident from rising sales vis-a-vis
falling advertising spend to sales ratio from 20% in 2002 to
17.1% in 2007.

Source: Company

Nestle India Ltd. (NESTLE)

23rd March 2009

SEGMENT-WISE PERFORMANCE
MILK PRODUCTS & NUTRITION
Product Profile
Revenue Contribution & Segment Growth
27.1%
22.6%

30%
25%

9.4%
43.7%

CY04

CY05

CY06

% of Total Revenues

15%
46.30%

9.0%

43.2%

9.1%

44.5%

20%

45.4%

47%
47%
46%
46%
45%
45%
44%
44%
43%
43%
42%
42%

10%
5%
0%

Milk Products and Nutrition is the largest segment

contributing 43-45% to the topline growing at
~12% CAGR over the last 5 years. Product
portfolio for this segment includes ghee, dairy
whiteners, packaged milk, Dahi (Curd), Fruit
Yogurt, baby & infant foods, cereals and
sweetened condensed milk. The contribution to
topline from this segment has been tapering since
last 4 years.

CY07 H1CY08
Segement Growth

Product Category

Brands

Nearest Competitor

Ghee

Everyday

Amul, Vijaya, Sagar etc.

Dairy Whitener

Everyday

Amul ( Amulya)

Packaged Milk

Nestle

Amul

Dahi

Nestle Fruit 'n' Natural

Amul, Mother Dairy etc.

Fruit Yogurt
Baby & Infant Food

Nesvita
Cerelac, Nan, Lactogen & Nestogen

Amul ( Amul Milk Powder)

Cereals

Cerevita

Kelloggs

Sweetened Condensed Milk

Milkmaid

Amul ( Mithai Mate)

Market Position
Apart from being No.1 in the baby and infant foods segment,
Nestle commands No. 1 position in the dairy whitener market
which is a niche product offering catering mainly to the
institutional clients. Nestles nutritional product offering in the
baby and infant foods segment has enabled it to garner No. 1
position in this segment. Nestle has created a strong brand
recall in this segment hence making it the preferred brand for
nursing mothers.
It has been a pioneer in the probiotic dahi segment a niche
offering of dahi containing friendly bacteria which helps
improving metabolism and digestion. Nestle also has strong
presence in the sweetened condensed milk segment through
its brand Milkmaid.
Strategy
Brand Extension + Wellness Platform

Nestle has launched brand extensions of its existing products

in the milk products segment while keeping health, wellness
and nutrition platform as the basis for its launch. Some
examples in this category include Everyday Slim (milk
powder), Nestle Slim Milk and Nestle Fresh n Natural Slim
Dahi & NesVita Probiotic Dahi.
This segment is seeing a rationalization of volumes growth on
account of its maturing product line & sustained increase in
average realizations. Its contribution to the topline is tapering
as the company is laying emphasis on other more profitable
business segments like prepared dishes & cooking aids and
beverages.

Nestle India Ltd. (NESTLE)

23rd March 2009

Outlook

Dairy Market Breakup in Volume (MT)

Dairy Market Breakup in Value Terms

(INR Crs.)
180,000
159600
160,000

140
120

22.5

100
80

120,000

60
40

140,000

21.4

100,000
80,000

97.5

73.1

42680

60,000

20

40,000

20,000

2005
Liquid Milk

82835

2011

22980

9100

0
2005
Liquid Milk

Converted Products

Dominance of cooperatives

4680

2011
Milk Powder Ghee

Milk and milk products form an essential part of the morning

meal for a majority of the global population irrespective of
age, culture or location. The milk-based food products market
in India has traditionally been dominated by cooperatives, thus
limiting the sourcing opportunities for private players. Many
multinational companies made attempts at cracking this
market but with little success.
Post-1992, some 15 domestic players entered the milk foods
market, but by the turn of the century more than half of them
folded. Indias dairy industry was largely ruled by cooperatives
and competing with them in terms of volumes, costs and
support was a far shot.
According to Dairy India 2007, of the total milk produced in
India (valued at around Rs 300,000 crore by different industry
players) only around 20% finds its way to the organized
sector. Of this 20%, half is managed by cooperatives and
government agencies.

Room for MNCs to grow

Organized retail convinience stores to

provide a platform for growth in this
segment

Nestles position

Dairy India 2007 survey estimates milk production to reach

120 mt by 2011 while consumption is expected to outstrip
production hence calling for more private participation in the
dairy sector. Clearly, there is room for MNCs and other
organized players to tap into this hugely unorganized market.
Emergence of large-scale convenience stores has improved the
market to a certain extent. There are better freezers and
storage facilities in supermarkets and retail outlets. The
consumers focus on healthier food options is also a reason for
companies to get into the fortified foods space, such as
probiotic. These store formats will give the necessary push to
the value added milk products segment as the urban
population moves up the value chain
Nestle has launched brand extensions of its milk products on
the nutrition and wellness platform. Nestle with its strong
brand and a head start in identifying this opportunity will
benefit with grocery retailing picking up in India.

Nestle India Ltd. (NESTLE)

10

23rd March 2009

PREPARED DISHES & COOKING AIDS

Product Profile
2 minutes thats the motto for this segment of Nestle. Maggi
is a household brand synonymous with instant noodles and
tomato ketchup. Product portfolio in this segment includes
instant noodles, tomato ketchup and soup mix. The
contribution of this segment to topline has been increasing
over the past 4 years from ~17.5% to 21.5%. This segment
has clocked a 17.4% CAGR over the last 5 years.
Revenue Contribution & Segment Growth

Product
Category

Nearest
Competitor

Brands

Ketchup

Maggi

Kissan

Instant noodles

Maggi

Top Ramen
(Nisin)

Soup

Maggi

Knorr

25%
20%

17.7%

19.0%

20.3%

30.6%

15%
10%
5%

21.4%

2.7%

19.3%

19.2%

CY05

CY06

23.10%
34%

0%
CY04

% of Total Revenues

CY07

40%
35%
30%
25%
20%
15%
10%
5%
0%

H1CY08

Segement Growth

Strategy
Two-pronged strategy value addition
to existing brands and increase
penetration across various pricing
points

The company has followed a two-pronged strategy in this

segment leveraging existing brands to introduce value added
products on the same platform and increasing penetration
levels by offering the products across various pricing points.
The company has garnered strong volumes growth in this
segment on account of launch of maggi noodles in a smaller
pack priced at INR 5/- to cater to the demand from all income
levels.
The company has launched dal atta and rice instant noodles
keeping in mind its wellness drive. Maggi cup noodles have
also been launched to make maggi preparation even quicker
and more hassle free.
In the ketchup segment also Nestle has re-launched products
in smaller bottles and satchets. Apart from that the company
has launched new products in the chutney segment (Indian
sauces) to cater to the Indian taste buds.
Nestle has used its Maggi brand to launch instant soups
against market leader Knorr. Maggi soups have been able to
garner a little less than 50% share in this market. Maggi
followed the launch of the soups with the brand extension of
Maggi Healthy Soups.
Outlook

Increasing income levels in Tier I and

Tier II cities has ushered in an
opportunity for convenience food
industry to grow

Increasing urbanization and growing proportion of working

women has given a boost to the Indian ready to eat food
market. Tier II and Tier III cities are also witnessing an
increase in general income levels hence increasing their
purchasing power. All these factors when put in perspective
ushers an opportunity for convenience foods industry to grow
faster.
If these food preparations are backed by nutrition and health
themes and are available at reasonable prices then this
segment can clock even higher growth as is being seen by the
functional foods industry presently in India. Nestles branding
of Maggi as a healthy convenient snack has enabled it to
maintain top spot in the instant noodle segment.

Nestle India Ltd. (NESTLE)

11

23rd March 2009

Nestles Position

Nestles leadership position in instant noodles and ketchup

segment and launch of brand extensions of the same on
nutrition based platform will help it grow even faster and
garner higher market share.
BEVERAGES
Product Profile
Nestles second most powerful brand (after Maggi) if
not the first is Nescafe its instant coffee brand.
Regular coffee drinkers express desire to have a
Nescafe synonymous to desire of drinking a hot cup
of coffee. Apart from instant coffee this segment
includes other brands such as Nestea (iced tea) and
Milo (brown drink mix). This segments contribution
has been tapering off from 22% to 20% over the
last four years. This segment has grown at 8.1%
CAGR over the last 5 years.

Revenue Contribution & Segment Growth

25%

25%

16.6%

9.7%

10.4%

10%

19.8%

15%

20%
20.5%

22.0%

20%

22.2%

19.4%

15%
10%

Nestea was launched in both lemon and peach

flavor. Nestea fast picked up in popularity and is now
the official iced tea brand at various eateries. Nestea
powder mix was also brought to the doorstep of the
retail consumer through the launch of various size
retail packs.

5%
5%

3.9%

-3.2%

0%

0%

-5%
CY04

CY05

CY06

% of Total Revenues

CY07

In the brown drinks market, Nestle Milo has been

positioned as a healthy option for growing kids.
Unlike the other two products in this segment the
brown drinks market is highly competitive with
Bournvita and Complan commanding more than
80% of the market.

H1CY08

Segement Growth

Product Category

Brands

Nearest Competitor

Instant Coffee

Nescafe

Bru

Ice Tea

Nestea

Lipton

Brown Drinks

Milo

Complan, Boost, Horlicks & Bournvita

Retail coffee vending targeting the

mass

Nestles approach

Nestle is different from a Caf Coffee Day or a Barista as it has

adopted different strategy to increase its penetration level. At
the institutional level Nestles Nescafe faces stiff competition
from Lipton & the emerging Caf Coffee Day vending SBUs.
Instead of catering to a specific age group or income bracket
Nestle has adopted a mass market strategy.
Nestle wants its coffee to be accessible to every income group
and age group. Nestle plans to increase its penetration in the
coffee vending business by following a franchisee approach.
Nestle identifies locations at educational institutions, business
complexes, malls etc. to set up caf and increase its vending
business. Nestle believes that these franchisees are like
laboratory for its product launches. One such launch has been
of Nescafe cold coffee which has become an instant hit in
Nestle beverage line up. At the retail level Nestle is pushing for
volumes growth through the launch of one person serving
sachets at affordable price.
Outlook

Coffee popularity is gaining momentum

with coffee retailing picking up

Nestle India Ltd. (NESTLE)

India is primarily a tea drinking market. Coffee popularity is

gaining momentum with coffee retailing picking up. Coffee
joints like Caf Coffee Day and Barista have worked to
popularize coffee as a beverage and have educated the
consumer about the product and its varieties.

12

23rd March 2009

With growing awareness of coffee as a beverage, Nescafe will

be a main beneficiary at the retail level as it will be able to
satisfy the consumers want of a good trusted quality, easy to
make, affordably priced coffee to make at home.
In the last three years, domestic consumption of coffee has
gone up steadily, with out-of-home consumption of coffee
growing at a faster rate of 12-13 per cent. Coffee consumption
in India is expected to rise by another 10% in the upcoming
crop year starting October to reach one lakh metric tons by
2009.
Iced tea is transforming the soft drinks market by becoming a
healthy substitute to aerated drinks and hence a necessary on
the menu cards at every restaurant, club or gathering.
CHOCOLATES & CONFECTIONERIES
Product Profile

Revenue Contribution & Segment

Growth
16%
16%
15%

14%

24.8%

14.6% 14.5%

15%
14%

30%

15.5% 15.6%

18.5%
2.9%

25%
24.50% 20%
14.0%

11.0%

15%
10%

KitKat, Eclairs, Polo, Milkybar, Munch and Nestle

Chocolate bar are the chocolate offerings by Nestle
available across all price levels. This segments
contribution to topline has been increased from 14.6% to
15.6% in the last 4 years. Margins in this segment vary
from 10% - 20% depending upon the product mix and
pricing point. This segment has recorded a 12% CAGR for
the last five years. Nestle is at No.1 position in the wafer
chocolate segment.

5%

13%

% of Total Revenues

H1CY08

CY07

CY06

CY05

CY04

0%

Segement Growth

Strategy
Brand extension at various pricing
points

Over the years Nestle has been able to grow in this segment
by launching brand extensions at various price points so as to
be able to cater to the demand of all segments. Volumes
growth is the main strategy in this segment. KitKat has been
growing the fastest in this segment.
Outlook
Estimated at INR 2,500 crs. the Indian chocolate industry is
led by Cadbury which has ~72% market share. Lower per
capita consumption of 300 gms in India vs. 1.9 kg in
developed nations presents an opportunity for high growth in
the Indian chocolate industry.
Nestle has created a niche for itself by emphasizing on mint
segment and wafer chocolate segment. Brand Equity & pricing
point are the main drivers for this segment of business. With
increasing raw material prices for chocolates this segment is
likely to undergo price hikes in the near future.

Nestle India Ltd. (NESTLE)

13

23rd March 2009

PEER COMPARISON

COMPANY NAME
GSK Consumer Ltd.
Colgate Palmolive
HUL
Nestle India Ltd.

NET
SALES

SALES
3-YR CAGR

1,542.78

12.31%

PAT
3-YR CAGR

PRICE

MCAP/
SALES

188.33

20.70%

03.9

PAT

P/E

DIV.
YIELD

1.6

13.5

2.48%

1,630.68

19.14%

268.78

25.66%

460.6

3.8

23.3

3.26%

16,345.19

13.90%

2,101.48

15.77%

233.0

3.1

24.2

3.86%

4,324.24

20.41%

534.08

19.94%

1,520.3

3.4

27.4

2.80%

Note: Sales and PAT figures are for CY08. Colgate is Dec. ending hence figures are TTM ending CY08. Price as on 20th March 09

Actually there is no one to one competitor for Nestle hence we

have conducted a peer comparison of Nestle vs. other FMCG
MNCs in India having presence across segments. As can be
seen from the table above Nestle has always traded at a
premium to its peers. This is primarily because Nestle has
created niches for itself through distinct product offerings and
thereby creating a leadership position in these segments.
Nestle commands a premium over its peers because of market
leadership in segments it operates in, trusted quality, and its
brand equity.
VALUATION
Nestle has over the years created a trusted brand for itself in
FMCG space. Over the years Nestle has understood the needs
of the domestic consumers and strived to meet their
expectations while assuring quality, taste, convenience and
affordability. Nestle has provided employment to over 1 million
people across India. Nestle has created a niche for itself
through its product offerings and hence created market
leadership in the segment in operates in.
Nestle is trading at substantial premium to its peers like HUL,
GSK Consumer & Colgate even on TTM basis at the CMP of
Rs.1,520. The stock trades at 22.2x its CY09E and 19.3x
CY10E EPS of INR 68.6 and INR 78.8 respectively. The product
positioning & increasing customer base provides sound growth
prospects over the long term.
We recommend
ACCUMULATE on dips for the stock with a price
objective of 15-17% upside over a period of 1-year.

Nestle India Ltd. (NESTLE)

14

23rd March 2009

FINANCIAL SUMMARY
(in INR crs.)

INCOME STMT.

CY07A

Net Sales

CY08A

CY09E

CY10E

3501

4324

4943.2

5513.5

2880.9

3491.5

3966.9

4410.8

619.7

832.8

976.3

1102.7

84.5

34.1

35.0

38.0

0.9

1.6

1.0

1.0

703.4

865.2

1010.3

1139.7

74.7

92.4

92.0

98.0

PBT

628.6

772.8

918.3

1041.7

Tax

214.8

238.7

257.1

281.8

PAT

413.8

534.1

661.2

759.9

0.0

0.0

0.0

0.0

413.8

534.1

661.2

759.9

42.9

55.4

68.6

78.8

Total Expenditure
PBIDT
Other Income
Interest
PBDT
Depreciation

Extraordinary Adj.
Adjusted Profit
EPS

(in INR crs.)

BALANCE SHEET

CY07A

Share Capital

CY08E

CY09E

CY10E

96.4

96.4

96.4

96.4

322.0

464.3

617.8

759.2

0.0

0.0

0.0

418.4

560.8

714.2

855.6

Secured loans

2.9

5.9

2.9

2.9

Unsecured loans

0.0

0.0

0.0

0.0

Total Debt

2.9

5.9

2.9

2.9

421.3

566.6

717.1

858.5

1179.8

1353.8

1453.8

1553.8

Less: Dep

578.0

664.0

756.0

854.0

Net Assets

601.8

689.8

697.8

699.8

73.7

0.0

0.0

0.0

Reserves & Surplus

Less: ME & RR
Net Worth
Minority interest

Sources of fund
Gross Assets (Net of revaluation)

CWIP
Investments

94.4

169.4

219.4

359.4

Current Assets

637.9

731.7

787.7

875.3

Inventory

401.2

399.9

456.5

507.5

Debtors

53.5

94.6

67.7

90.6

Cash & Bank

37.8

76.8

88.1

96.7

Advances

145.4

160.4

175.4

180.4

Current Liabilities & Prov.

986.5

1024.3

987.8

1076.0

Current Liabilities

460.0

543.0

587.0

652.7

Provisions

526.5

481.2

400.7

423.3

Working Capital

-348.6

-292.6

-200.1

-200.7

Uses of Funds

421.3

566.6

717.1

858.5

Nestle India Ltd. (NESTLE)

15

23rd March 2009

(in INR crs.)

RATIO ANALYSIS

CY07A

CY08E

CY09E

CY10E

PROFITABILITY RATIOS
PBIDT(%)

17.7%

19.3%

19.8%

20.0%

PBDT(%)

20.1%

20.0%

20.4%

20.7%

PBT(%)

18.0%

17.9%

18.6%

18.9%

PAT(%)

11.8%

12.4%

13.4%

13.8%

Tax Rate(%)

34.2%

30.9%

28.0%

27.1%

RoCE(%)

152.3%

156.8%

143.2%

132.4%

RONW(%)

102.5%

109.1%

103.7%

96.8%

EPS

42.9

55.4

68.6

78.8

P/E

21.8

27.0

22.2

19.3

CEPS

50.7

65.0

78.1

89.0

BV

43.4

58.2

74.1

88.7

DPS

33.0

42.5

45.0

55.0

EV/EBITDA

23.6

17.5

14.9

13.2

0.0

0.0

0.0

0.0

Net Sales

24%

24%

14%

12%

PBIDT

20%

34%

17%

13%

Adj.PAT

31%

29%

24%

15%

5.6

6.3

7.1

7.9

43

42

39

40

53

52

52

51

13.4%

4.4%

3.8%

3.6%

0.6

0.7

0.8

0.8

VALUATION RATIOS

Debt/NW
GROWTH RATIOS

Net Sales to Net FA (x)

LIQUIDITY RATIOS
Inventory (Days)
Debtors (Days)
Creditors (Days)
Other Income / PBT
Current Ratio

Nestle India Ltd. (NESTLE)

16

23rd March 2009

Corporate Office:
nd

Manu Mansion, 2

Floor, 16, Shahid Bhagatsingh Marg, Fort, Mumbai 400 001. Tel. 91-226633 8900 / 2261 8787 / 4027 8900

Fax No. 91-22 2269 0041

Email: research@technogroup.co.in

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Nestle India Ltd. (NESTLE)

17

23rd March 2009