Nestlé India - Danone to enter baby foods market ::JPMorgan

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Nestlé India Limited
Neutral
NEST.BO, NEST IN
Danone to enter baby foods market


 Danone  to move into  the  India baby  foods market. Danone (covered
by JPM analyst Polly Barclay) has signed an agreement with Wockhardt
Group to acquire its nutrition business and thus enter the baby nutrition
and  medical  nutrition  markets  in  India.  Under  the  agreement,  Danone
will  acquire  Wockhardt’s  nutrition  business  and  brands  as  well  as  its
related  industrial  operations  (located  in  Punjab)  for  ~€250  mn.
Wockhardt’s  baby  nutrition  brands  include  Dexolac,  Farex  and
Nusobee, which together account  for ~7%  share of the  India baby  food
market, as per Euromonitor. In addition, the nutritional supplement brand
Protinex is likely to give Danone a  strong  foundation  for developing its
medical nutrition business.
 Rationale  for  Danone’s  acquisition.  Danone  is  trying  to  enhance  its
presence (both in terms of product categories and geographical reach) in
India. It started testing Indian waters with the launch of yoghurt (regular
and flavored) in Indian markets about a year back and is in the process of
scaling that up. This acquisition is likely to provide Danone with access
to a wider distribution network (chemists particularly).
 More  competition  for  Nestlé long  term? Nestlé India  is  the  market
leader  in  the  baby  foods  category  in  India  with  a  share  of  over  75%.
Baby foods cannot be advertised in India (by regulation), which acts as a
significant  entry  barrier  for  a  new  brand. With  the acquisition, Danone
has tried to leverage on Wockhardt’s existing brand franchise to  expand
its product reach. Clearly this move will be  keenly monitored to see any
incremental impact on Nestlé’s baby food brands over the medium term;
these brands have  had  a  fairly  stable  market  share  over  the  past  few
years.
 India baby foods market. The Indian baby foods market is estimated to
be  ~Rs17.5bn  (as  per Euromonitor). Nestlé is the  dominant  player with
~75% share. In India, per capita consumption of baby foods is quite low
(refer  Fig  3)  which  highlights  potential  for  growth  in  this  category.
Furthermore over  25mn  children  are  born in  India  each  year, making it
one of the fastest growing infant nutrition markets globally.
 Global  infant  nutrition  market. The  global  infant  nutrition  market  is
consolidated.  The  three  largest  players  – Nestlé,  Danone  and  Mead
Johnson – account for approximately half the market and the  six largest
players  – Nestlé,  Danone,  Mead  Johnson,  Abbot,  Pfizer  and  Heinz  –
account for roughly two-thirds of the market (ref. Fig 2). Asia Pacific is
the largest infant formula milk market by region accounting for 45%
of the global infant formula milk market.