FMCG stock: Nestle's growth trajectory will remain healthy, say experts

Nestle India
Not many would have placed a bet on Nestle three years ago, when it was in the midst of the Maggi fiasco that took a toll on its finances and on shareholder returns. Now, however, investors are seen lapping up Nestle. Not only has it outperformed the prominent indices, though partly helped by the base effect on account of past under-performance, it is the second best performing stock in the fast moving consumer goods (FMCG) space in 2018 so far. And, despite the rise, the Street is still bullish on Nestle.

Better growth profile

Rebounding from the Maggi controversy under the new management, Nestle turned aggressive, with a focus on driving growth via higher volumes, product premiumisation (emphasis on nutrition and value-addition), new launches and offering value to customers.

In a note last month, analysts led by Abneesh Roy at Edelweiss Securities said Nestle has been posting sustained volume-led growth across categories, fuelled by new product launches. In the past 18 months, at least 45 new products were launched and many have been good successes. Navin Kulkarni, FMCG analyst at PhillipCapital, adds, “The benefits are now showing. The management has turned more aggressive, its go-to-market strategy is helping and there is increased focus on volumes. As a result, the revenue growth profile has improved significantly.” 

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In CY2017 (Nestle follows a January to December accounting year), there was volume growth in all its four product categories. From two per cent in its largest category of milk & nutrition (almost half Nestle’s sales), the growth was as high as 19 per cent in prepared dishes and cooking aids, which includes Maggi noodles and forms 27 per cent of sales. And, a fifth of this growth came from new products.

Suresh Narayanan, Nestle India’s chairman and managing director, said after the March quarter results that many products were at different stages of launch. And, that innovation, renovation and volume-based growth are the core business strategies.

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So, the Street is hopeful that Nestle’s growth trajectory will remain healthy. Roy says, “Nestle’s focus on innovation, new launches, market share and premiumisation is envisaged to boost volume-led growth. Also, the company’s new strategy—top line and market share focus–is encouraging.”

Consumer habits change

 
Despite urban India seeing some soft growth as compared to recovery in rural markets, Nestle is doing well even as it gets a large share of its revenues from the cities. One reason is that unlike a relatively mature category like soaps and detergents, there is good scope for increasing penetration in the segments it is in. Elara Capital’s analysts in a note last month said penetration and distribution of packaged foods and beverages is far lower–Maggi, for instance, is present in 4.5 million outlets as compared to 7.6 million of Unilever’s Surf.More, habits in the top cities (including tier 1 and 2) are changing, aided by the large millennial population, rising aspirations and consumption. The increasing need to travel, rising numbers of working women and nutritional factors are driving these. Other companies would also gain but Nestle could benefit more. 

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Besides focusing on growth across categories through new launches and promotions, Nestle is also tying up with online players. To further expand its portfolio, it recently said it would be launching global cereal brands here. This should help tap a fast-growing and large segment. Analysts expect Nestle to launch more products over time, from the portfolio of its global parent.

Outlook

 
After an estimated 10 per cent growth in the March quarter, analysts expect Nestle to clock an eight to 10 per cent increase in volumes in CY18. Kulkarni expects volume growth of 10 per cent for CY18 and 8-9 per cent in CY19. This is a big positive—until recently, volume growth was largely muted.

 
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Profitability is also expected to remain elevated amid benign raw material costs, such as of sugar, wheat and milk. Operating profit margin in January-March was at a multi-quarter high of 26.1 per cent. Apart from lower input costs, Nestle has kept a tight lid on other expenditure, which as a percentage of net sales has fallen from over 27 per cent in the December 2015 quarter, to below 24 per cent in the March 2018 quarter.

 
The risk to margins would come from a sharp rise in the price of inputs such as milk, edible oils, sugar and/or wheat flour, something not expected in the near term. The other risk would be if the new launches don’t deliver the anticipated results. For now, analysts seem confident of Nestle’s future. Edelweiss estimates a compounded annual growth rate (CAGR) of 25.5 per cent in net profit during CY17-20, on a 15.3 per cent CAGR in net sales, while Elara expects a 25 per cent CAGR in earnings during CY17-20.

 
Since analysts’ one-year target price for the stock ranges from Rs 10,000 to Rs 11,000, investors could wait for a better entry point, given the recent rally.

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