Nestle India: A Future In Milk-Motilal Oswal

Nestle India’s 1HCY08 performance reaffirms our strong belief in the company’s growth potential. Its business strategy is in line with the parent's and we believe that its focus on innovation and renovation would help it to maintain leadership. Maggi noodles enabled 19.3% domestic volume growth in 1HCY08 Nestle has reported robust volume growth of 19.3% in domestic business in 1HCY08. Volumes of Prepared Dishes (noodles and culinary products) have grown 30% while Chocolate & Confectionary volumes have grown 20%. Dairy Products volumes have increased 10% while domestic Beverages volumes have grown in single digits. The company has been able to hold its leadership position in infant foods, noodles, ketchup, white chocolates, wafers, and coffee. Contribution of new products has grown 5x since CY03 Nestlé’s renewed focus on innovation and renovation has resulted in a 5x increase in sales of products/variants launched in the last three years. The company has entered functional foods and has launched NIDO (milk powder for children above two years), Milkmaid Funshake (flavored milk in five variants), MILO Smartplus (Rs88/500gm), Nesvita Multigrain breakfast cereal and Nesvita Pro Heart milk (with omega-3). It aims to achieve product differentiation based on cutting-edge research and speed of innovation which should ensure sustained competitive advantage and healthy profit margins. Management confident of maintaining margins Nestlé’s gross margins for 1HCY08 were flat despite a sharp run-up in input costs (prices of oils, green coffee, milk solids and wheat have increased by 23.5%, 21.7%, 10% and 5.4%, respectively). 9-10% increase in finished goods prices, 60bp gains from Pantnagar facility and sourcing advantages in liquid milk have enabled 60bp margin expansion in 1HCY08. The management is confident of maintaining margins. Best placed to tap processed foods opportunity; maintain Buy The management foresees huge growth potential, as consumers are indulging in choice-driven consumption for the first time and are more willing to experiment. Nutrition and wellness are becoming more relevant to top-end consumers; this should fuel the demand for functional foods. Nestle is well placed to tap incremental demand from the low end segment (MRP less than Rs10/SKU), which has grown at a CAGR of 20% since CY03. We believe that Nestle India's goals and strategies are in sync with the parent which will enable faster technology and new product knowhow transfer, making it best play in the processed food sector in India. The stock trades at 28.2x CY08E EPS of Rs59.6 and 22.2x CY09E EPS of Rs75.9. We maintain Buy with a target price of Rs1,900 – an upside of 13%.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice.