Nestle :Management meeting confirms near-term caution:: , Nomura research,

We met the top management of Nestle India at their half yearly analyst
meet. The feeling we get coming back from the meeting is quite mixed;
while volume growth is not as bad as it seems, the company is still well
below its long-term average and will take time to improve. However, the
impression we got was that management was quite confident in growth
from a long-term perspective and seems to have a very clear strategy
already in the works. Our key takeaways from the meeting:

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 Volume growth has been a major investor concern. However, if
adjusted for: 1) cut-backs in affiliate exports (down 27% y-y in
1HCY12); 2) product discontinuation (particularly hit is the chocolates
portfolio); and 3) channel rationalization (Canteen Sales Department
and out-of-home), volume growth would have been 4% in 1HCY12
and not the negative number that was reported.
 This channel and product rationalization will be visible in the numbers
for one more quarter (going on for three quarters now), and then
things should start improving on a y-y basis.
 The company is not looking to improve margins at the cost of volumes.
Margin improvement is due to: 1) product mix improvement (due to
discontinued low margin products); 2) channel mix improvement (they
don't make money on affiliate exports); and 3) benefits of MM11 (a
cost-savings programme called “Margin Management 2011”) have
started accruing. Margin expansion is likely to continue into the next
couple of quarters, albeit at a slower pace.
Long-term strategy: the company will focus on:
 Regionalisation: All products will be tinkered with and altered for
different states and regions. They believe that one product can’t be
sold across all of India.
 Distribution: They have already doubled the coverage of retail points
from 2mn to 4mn over the past few years. This will continue,
particularly in the rural market, which increasingly is a key focus area.
 Innovation: while the number of innovations will come down, the
quality will go up dramatically. The recently launched “Milkmaid
Celebration” is a case in point.
 Digitalization of communication: They will focus a lot more on
Facebook and other such portals to create pages, websites etc. to
connect with urban consumers. However, this does not mean that
conventional media such as TV and print will be ignored.
Problem areas:
 Competition: This has been increasing, and they have clear plans for
tackling it. A case in point is instant noodles, where market share and
the growth of Maggi has stabilized and they are now stepping up
promotions.
 Coffee: performance of this portfolio has been below par and below
potential. They will take steps in product and on the promotion side to
tackle this problem. Capacity expansion programme is already over and capacities have
been doubled across all product/brands. This will soon result in
interest cost stepping up (which was so far being capitalized as a part
of CWIP).
 Input costs continue to remain a cause of concern (unlike the popular
belief). Liquid milk prices are up 11% milk solid process prices are up
9%. Wheat in particular is a major issue both in terms of price and
availability. 1HCY12 weighted average cost inflation for Nestle has
been ~7%.
So overall, the company is cautious from a near-term perspective,
however they remain optimistic about its opportunities from a long-term
perspective. Management is also clear that growth is a priority but not at
all costs; they will try and maintain a fine balance.