Nestle India :Timely expansions provide comfort -Macquarie Research

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Nestle India
Timely expansions provide comfort
Event
 We interacted with the senior management of Nestlé India (NEST IN, Not rated)
at the analyst meeting held in Delhi on 17 March. Nestlé’s management is
confident of strong volume growth and has guided for the maintenance of its
operating margin band (17–18%) despite raw material cost pressure. Nestlé’s
capacity expansion plan is on track and provides a strong growth outlook.
Impact
 Aims to double sales and profit in next 3-4 years. Management is
confident about doubling its sales and profit in the next 3-4 years on strong
demand growth in premium and popular products and with a focus on new
launches and distribution reach. For CY10, Nestlé reported 22.9% YoY
domestic sales growth, aided by sales growth in prepared dishes and cooking
aids (↑29.2%), chocolate and confectionary (↑25.7%), and milk products and
nutrition (↑20.1%). Domestic volume grew by 17.6% YoY.
 Despite challenging cost environment, margin improved. During CY10,
Nestlé reported operating profit margin of 18.2% (↑30bp), despite raw material
cost pressure. Although it is cautious on costs, management is confident of
maintaining its operating margin band (17-18%), even with cost pressure in
key commodities such as coffee, palm oil and milk, through a better product
mix, calibrated price hikes and operating leverage.
 Focus on new launches and distribution. New launches are planned in
popularly priced point, nutritional, out of home and premium categories. Also,
Nestlé enhanced its distribution reach by adding 464,000 new points of sales
in CY10, and it aims to expand its reach further in tier II, III and IV cities.
Strong demand for premium products in smaller cities has strengthened its
distribution expansion strategy, despite high food inflation.
 Expansion plan on track and geared to meet demand growth. Nestlé’s
expansion plans are progressing well, and it has received US$450m debt funding
from its parent for its expansion. It expects to complete the Nanjangud (noodles,
trial run), Bicholim (pasta, first line started) and Ponda (chocolate) expansions in
CY11, and its Samalkha (nutritional) and Tahliwal (chocolate and noodles)
expansions in CY12. In addition, it expects debottlenecking and operational
efficiency at existing facilities to help meet near-term demand growth.
 New excise duty can affect operating margin by 50bp. According to
Nestlé’s management, a 1% excise duty levied in Union Budget will affect its
EBIT margin by 50bp in the absence of any action. However, the company
can pass through the recent excise duty hike to its customers due to its
pricing power.
Outlook
 Nestlé is present in very high-growth categories, where penetration levels are
very low and competition is modest. Nestlé has consistently delivered ROEs
and ROICs of over ~100% and 60%, respectively.
 Nestlé is trading at 35x CY11E and 29x CY12E PER, based on Bloomberg
consensus estimates.