Nestlé India Limited :Annual Report Review: Volume concerns dominate 2012; hoping for a better 2013: JPMorgan

We analyse 2012 annual report for Nestlé India in this note. Post nearly flat
volume growth in 2012, we expect growth rates to recover in 2013 supported by
new capacity commissioning, wider product base and enhanced distribution
reach. EBITDA margins in 2012 were the highest seen in the past decade,
benefiting from price increases and favorable product/channel mix. Management
anticipates that moderation in growth rates will show steady recovery in the short
term and growth momentum will revive soon.
 Pricing led growth in 2012 as vol growth was nearly flat at 0.8% impacted
by challenging macro impacting packaged food industry growth adversely,
lower export sales and to some extent by portfolio churn in favor of better
margin products in chocolate and milk product segments. Revenue growth
across categories - milk pdts: 15% (vol:-5%, price: 21%), beverages: 5% (vol:-
5%, price: 11%), prepared dishes: 13% (vol:8%, price:4%) and chocolates:6%
(vol:-9%, price:17%). Vol growth moderated more in 2HCY12 to 0.5% vs.
1.1% in 1HCY12. Revenue mix was relatively stable vs last year. New
product/variant launches and renovations continued particularly in prepared
dishes and dairy segment. In 2012, Nestlé added 0.5mn new retail outlets
(0.4mn added in 2011). The number of SKUs was reduced by over 20%,
bringing down complexity costs across value chain.
 Substantial margin improvement. Commodity cost pressures were managed
well via price hikes, cost control and improved product/channel mix. Gross
margins expanded sharply by 250bp y/y and EBITDA margin improved 130bp
y/y, though employee (+21% y/y) and power & fuel (+25% y/y) costs were
higher. A&P spends were up only 9% y/y with A&P/Sales dropping to 4.3%.
 Capex and debt levels remain high; WC improves further – Capex in 2012
stood at ~Rs10bn. Over 2010-12, total capex has been ~Rs30bn which compares
against cumulative capex of ~Rs13bn over CY06-10. Debt levels stood at
US$192mn, which are likely to remain stable considering the significant
capacity expansion plans are largely done. Cash conversion cycle improved as
increase in payable days offset some deterioration in inventory days.
 2013 should be better we think. We expect volume growth rates to recover
gradually in 2013 supported by new capacity commissioning, wider product
base, enhanced distribution reach and a bit more competitive pricing in some of
the categories. RM inflation outlook appears benign and that should help
margins to hold out.

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