Nestle India Analyst meet: Excessive margin focus a long-term risk ::Credit Suisse

● Nestle held its analyst meeting yesterday, where it signalled no
change in direction in the company’s margin-focussed strategy.
● We believe the company's priority is margins. Nestle continues to
discontinue low-price SKUs where margins are not ‘acceptable’;
1H CY13 saw 250 bp of volume impact. With the company level
EBITDA margin at over 22%, we find it tough to understand this
strategy. Also it is surprising that the company has cut ad spends
by another 30 bp from an already low base in this environment of
negligible volume growth.
● Nestle's volumes grew 1.6% YoY in 1H CY13, on a base year with
almost zero volume growth. Milk and nutrition, and chocolates
continue to see significant YoY volumes decline. We expect market
share erosion to continue. Increasing competition in milk and
nutrition from Danone and Abbott, and media reports of ITC’s entry,
make Nestle highly vulnerable to further share loss, in our view.
● We maintain our UNDERPERFORM rating. We believe any recovery
in growth rates has to be preceded by a period of margin pain. In the
interim, we see risk for the company from high competition.

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Nestlé’s strategy diverges from that of other consumer
companies; we believe excessive margin focus puts longterm franchise at risk
Most consumer companies in India, domestic or MNC, are focussing
on tapping into the lower-income consumption growth through lower
price points and rural distribution expansion. However, Nestlé is
actually following a strategy of giving up low-price SKUs; thereby,
losing market share to competition. This excessive margin focus,
despite having one of the highest EBITDA margins among consumer
companies (22% of sales), is very risky for the long term, in our view.
The cost of gaining back market share is likely to be much higher than
the short-term margin gains. The cut in ad spends is particularly
worrying from a long-term perspective.