PL Stock Report: Nestle India (NEST IN) - Analyst Meet Update – Building blocks for sustained growth - Accumulate

Nestle India (NEST IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs24,245 | TP: Rs25,471

Analyst Meet Update – Building blocks for sustained growth

Quick Pointers:

♦ NEST is building capabilities given huge penetration led growth across existing and new products given rising influence of Gen Z

♦ Aims for 10 new launches, NPD share at 6.1%, cost optimization focus across Mfg., sourcing and supply chain

Nestle India gave 10 Mantras to sustain growth which includes 1) huge scope to increase penetration across segments 2) distribution reach (reaches 2/3 of addressable households) 3) innovations (120 innovations in 7 years, 10 in pipeline with 6.1% of sales) and 4) RURBAN led growth (rising accessibility and affordability). NEST is building capabilities to sustain double digit growth by 1) significant capex program of Rs50bn 2) continued investment in distribution expansion and supply chain 3) new innovations and categories like Pet Care, Millets etc. NEST is targeting to gain from a shift in not only growth of F&B market but a 20x gap which exists between branded and overall food market.

We believe input cost inflation remains a near term challenge given coffee, sugar and Milk inflation and global geopolitical uncertainty although it aims to reduce impact by efficient sourcing, supply chain, manufacturing and distribution efficiencies. Long term growth drivers remain intact, led by 1) sustained expansion in rural reach (~20-25% of sales) 2) capacity increase in Maggi & confectionary 3) huge scope of growth in segments like coffee, RTD, chocolates & Pet care and 4) channels of future like E-commerce (6.6% of revenues). We estimate 12.2% PAT CAGR over CY23-25. We expect steady returns in near term despite rich valuations of 63.1x Sept25 EPS. Maintain Accumulate with a DCF based TP of Rs25,741 (unchanged).

Analyst Meet Takeaways: 1) There has been an increase in regional competition in noodles category but not much traction 2) The company may vacate the Rs2 SKU but will continue to remain in the Rs5/10 SKU 3) Pricing actions are the last option with first effort to create internal savings 4) The company has taken price actions across 50% of the portfolio and does not expect big rollback in prices 5) Premium products are growing at 2-2.5x of the company average enabled by use of analytics, digital and close eye on on-ground behavior 6) Petcare integration is complete & category is an area of serious interest and should see higher product range given global expertise in coming periods 7) Launched 125+ products over the last 7 years and 10 more products in pipeline. NPD contributed 6.1% of sales in 9MCY23 8) NEST has accelerated development of manufacturing & supply chain capabilities for faster growth 9) E-com salience has increased to 6.6% of domestic sales in 9MCY23. The channel has grown by 20% in 9MCY23 10) Remains open for acquisitions with criteria on fit, capability and valuations 10) Royalty agreement with parent Nestle SA comes up for renewal in Jun’24. Agreement provides access to 2000 brands, R&D support etc. 11) The company has increased its efficiency/effectiveness of ad spends with higher portion of spends towards digital (vs 2 years ago) 12) Focus remains to grow via penetration led volume growth

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