Management Meet Note Rating matrix Rating : Buy Target : 76 Target Period : 12-15 months Potential Upside : 15% What s changed? Target EPS CY17E EPS CY18E Rating Unchanged Unchanged Unchanged Unchanged Key financials Crore CY15 CY16 CY17E CY18E Net Sales 8,123.3 9,49.6 1,737.1 12,194.8 EBITDA 1,633.9 2,19.7 2,157.2 2,576.7 Net Profit 563.3 1,1.4 1,247.9 1,522. EPS ( ) 58.4 13.9 129.4 157.8 Valuation summary CY15 CY16 CY17E CY18E P/E 113. 63.6 51. 41.8 Target P/E 13.1 73.2 58.7 48.2 Div. Yield.7 1. 1.5 1.7 Mcap/Sales 7.8 6.8 5.9 5.2 EV/EBITDA 38.7 31.1 29.1 24.5 RoNW (%) 32.3 36.2 39.3 45.2 RoCE (%) 29.7 34.9 36. 45.3 Stock data Particular Amount Market Capitalization ( Crore) 63662 Total Debt (CY16) ( Crore) 33.2 Cash & Investments (CY16) ( Crore) 2,155. EV ( Crore) 61,54.4 52 week H/L 762 / 571 Equity capital 96.4 crore Face value 1 Price performance 1M 3M 6M 12M Nestle India -3.4.5 3.7-3.1 HUL 1.8 15.6 37.4 27.9 ITC -4. -6.2 6. 12. GSK Consumer -3.9.3 1.8-15.6 Research Analyst Sanjay Manyal sanjay.manyal@icicisecurities.com Tejashwini Kumari tejashwini.kumari@icicisecurities.com Volume growth remains key focus August 28, 217 Nestlé India (NESIND) 663 Nestlé India (NIL) hosted its annual Analyst Meet on August 24, 217. In the meeting it focused on initiatives and agendas to achieve double digit growth, going ahead, led by volume, with large focus on new product launches across categories. Other key thrust areas highlighted are a) increase in product penetration and saliency, b) innovation and renovation across brands, c) explore channel specific initiatives or alternate business opportunities and d) continued investment in growing the product portfolio. Enthused by management s positive and determined commentary, we maintain our estimate of 13.8% CAGR in revenue over CY16-18E factoring in CAGR of 1.5% for blended volumes. Key takeaways of analyst meet: Maintain leadership in key categories: NIL enjoys leadership position in instant noodles & pasta, infant cereals, tea creamer and white & wafer chocolates. It holds second position in the ketchup, chocolates and instant coffee categories. Maggi has successfully gained 5 bps market share in the past year which is currently at 59.9% GST implementation was smooth: NIL was proactively engaged in awareness programmes across India for its 35 suppliers and 16 distributors & successfully started billing from day one of GST implementation. Though the growth was impacted during GST transition in June, company remains positive on the business environment post the implementation of GST. GST implementation provides the company cost saving and recalibrating opportunities in the distribution channel. The company has passed on GST benefits to customers in the dairy whitener, sauces and infant cereal categories Domestic sales during H1CY17 grew 9.3% in terms of revenue and 9.5% in terms of volumes (1.9 million tonnes). This 9.3% growth was contributed by 2.8% through Maggi portfolio, 2.4% through new product launches and rest 4.1% through the non-maggi portfolio. Contribution from the new launches has grown significantly over the past year. It was mere.7% in H1CY16 and grew to 2.2% in H2CY16 and 2.8% in H1CY17. The company remains focused on new launches to drive future growth As on H1CY17, the FMCG market is pegged at US$45 billion, with F&B contributing US$25.2 billion. The processed food market is US$14.5 billion. In that, Nestlé s categories account for US$4.1 billion. The huge size of the processed food market provides the company with a great opportunity to grow with the help of aforementioned agendas The commodity price index for NIL was favourable during CY15 and CY16. However, due to increase in prices in milk, green coffee and sugar, it was up 7.5%, in H1CY17 Five years tax holiday at 1% of profits ended for Samalkha Unit II on 31st Mar, 217, now it is eligible for 3% for the next 5 years Maintain our estimates; reiterate BUY We maintain our revenue estimate of 13.8% CAGR over CY16-18E factoring in blended volume CAGR of 1.5%. We believe that the leadership position, market share gains and new product launches would aid this growth. Given the competitive environment across categories, we factor in 2.% and 3.2% blended realisation growth for CY17E and CY18E, respectively. PAT is estimated to grow at a CAGR of 23.3% over CY16-18E. We reiterate our BUY recommendation on the stock with a revised target price of 76/share. ICICI Securities Ltd Retail Equity Research
Exhibit 1: Growth across categories Value ( billion) Volume (' tons) H1CY16 H1CY17 % growth H1CY16 H1CY17 % growth Comments Milk products & nutrition 22.2 22.9 3.4 62.6 62.5 -.2 Overall Growth adversely impacted by availability of Surplus Fat Prepared dishes & cooking aids 11.1 13 17.9 85 98.7 16.1 Strong comeback of Maggi and valuing up of the portfolio Chocolates & confectionery 5.5 6.2 1.9 17.4 18.4 5.7 Strong growth in KitKat and Munch, focus on premiumisation Beverages 4.5 5.2 15.1 7.3 9.1 24.7 Volume growth led by RTD launch in Nescafe and MILO Exhibit 2: Maggi gains 5 bps market share in value terms 57.4 58.3 59.1 59.9 6 54.9 55 5 47.5 45 4 Q1CY16 Q2CY16 Q3CY16 Q4CY16 Q1CY17 Q2CY17 Maggi market share (%) Exhibit 3: Sales growth trend (%) 4 34.6 3 2 16.4 15.9 1 9.1 7.3-1 Q1CY16 Q2CY16 Q3CY16 Q4CY16 Q1CY17 Q2CY17-7.8 Sales growth (yoy %) Category contribution in domestic growth (%) H1CY16 H1CY17 Milk products & nutrition 51.2 48.5 Prepared dishes & cooking aids 25.6 27.6 Chocolates & confectionery 12.8 13. Beverages 1.4 1.9 Exhibit 4: New launches Aggressive new launches; advertisement continue to support NIL launched a host of products during the quarter across categories and reiterated its focus on volume led growth. Contribution from new launches has grown significantly in the past year. It was mere.7% in H1CY16 and grew to 2.2% in H2CY16 and 2.8% in H1CY17. The company remains focused on new launches to drive future growth. During Q2CY17, the company grew 8.2% YoY. Half of the growth was contributed by the non-noodles category, one-fourth by the noodles category while the rest came from new launches. The marketing spend by the company grew 5.9% YoY in H1CY17 mainly towards new product launches and digital platforms. Additionally, NIL has come up with an initiative to fortify its products in order to support the national priority of reducing the deficiency level of important nutrients among children. It is fortifying Maggi, MILO, Ceregrow, Nestle A+ Nourish milk with micronutrients. As per the national survey conducted by Ministry of Women and Child Development (213-14), 7% of the children below age of five years are iron deficient, 65% of them are vitamin A deficient and 45% are zinc deficient. ICICI Securities Ltd Retail Equity Research Page 2
Key raw materials Contribution to raw material YoY infaltion Milk 44% 14% Skimmed milk 3% 21% Green coffee 1% 23% Wheat flour 11% 1% Sugar 7% 1% Inflationary pressure seen in H1CY17 Raw material cost for the company has grown 27 bps YoY as percentage of sales for H1CY17. However, on account of realisation improvement, product and channel mix, the company is able to pass on 11 bps. Thus, the effective rise during H1CY17 was at 16 bps. The commodity price index for NIL was favourable during CY15 and CY16. However, in H1CY17, it was up 7.5%. Any further increase in inflation may require the company to undertake price hikes. Key financial charts Exhibit 5: Revenue to grow at 13.4% CAGR over CY16-18E Exhibit 6: Revenue growth to be mix of volume & realisation growth 13 11 9 7 5 3 1-1 1.8 9.1 14.1 13.6 9.1 8.2-17.2 CY12 CY13 CY14 CY15 CY16 CY17E CY18E 2 15 1 5-5 -1-15 -2 4 3 2 1-1 -2-3 -4 CY12 CY13 CY14 CY15 CY16 CY17E CY18E Net Sales ( crore) - LHS Net Sales Growth (%) - RHS Volume Growth (%) Price Growth (%) Exhibit 7: EBITDA margin (%) trend Exhibit 8: PAT trend (%) 23 21 19 17 15 22.3 21.7 21. 21.3 21. 2. 2. CY12 CY13 CY14 CY15 CY16 CY17E CY18E 16 14 12 1 8 6 4 2 CY12 CY13 CY14 CY15 CY16 CY17E CY18E Net Profit ( crore) PAT Growth (%) 1 8 6 4 2-2 -4-6 ICICI Securities Ltd Retail Equity Research Page 3
Outlook & valuation We remain positive on the company s future prospects given its thrust on a) creating a balanced portfolio through new launches and planned entry in new categories, b) aggressive communication strategies and c) expanding the reach. Rapid urbanisation and increasing participation of women in decision making is a huge opportunity for the company given the nature of its product portfolio. The company is gearing up to tap the same with new launches with the proposition of convenience, nutrition and on-the-go usage. Thus, we believe the stock would continue to trade at a premium multiple as it has commanded in the past. We model net sales CAGR of 13.8% in CY16-18E and earnings CAGR of 23.3% for NIL during the same period. We remain positive on the growth outlook. We reiterate our BUY recommendation on the stock with a target price of 76/share valuing it at an earning multiple of 48x for CY18E. Exhibit 9: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) CY16 949.6 15.8 13.9 77.8 63.6 31.1 36.2 34.9 CY17E 1737.1 14.1 129.4 24.6 51. 29.1 39.3 36. CY18E 12194.8 13.6 157.8 22. 41.8 24.5 45.2 45.3 ICICI Securities Ltd Retail Equity Research Page 4
Recommendation history vs. Consensus ( ) 8, 7, 6, 5, 6. 5. 4. 3. 2. 1. (%) 4, Aug-15 Oct-15 Jan-16 Mar-16 Jun-16 Aug-16 Nov-16 Jan-17 Mar-17 Jun-17 Aug-17. Price Idirect target Consensus Target Mean % Consensus with SELL Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event CY1 ITC and GSK Consumer enter instant noodles segment intensifying competition in the near monopoly segment for Nestlè Jul-11 Decline in coffee prices (~11% since April, 211); revenue growth & margins back to 2%+; FMCG Index return - ~33% in Q2CY11 Jan-12 Volume growth in CY11 dips to 7% vs. 17% in CY1; increasing prices due to higher input cost impacts volume growth; ITC gets aggressive in noodles segment with HUL re-launching Knorr in the segment H1CY12 Declining volume growth keeps revenue growth below 15%; higher margins (+21%) continue to drive profitability (+15% YoY); stock supported by rising FMCG index (~26% return YoY) as a safe haven during underperforming markets CY12 Stock return ~13% due to less than 1% volume growth in CY12, thereby not justifying high valuations; FMCG Index return CY12 - ~3% Apr-13 Intensifying competition and incessant price increases across categories drags revenue growth to ~9% with volume growth at 2-3% Jul-13 Decline of ~25% in coffee prices YoY; revival in revenue growth to ~12% supported by price cuts in milk products and new launches in noodles segment; FMCG continues to remain the preferred sector among investors (FMCG Index return ~35% YoY in Q2CY13) Nov-13 Rumours of buyback by the parent drive stock price; revenue growth remains muted Jan-15 Softening commodity prices aiding the company's operating margins Apr-15 UP FSDA orders recall of 2,, packets of Maggi noodles citing higher lead content beyond permissible limit thereby declaring it unsafe Jun-15 FSSAI bans sale of Maggi noodles in India Oct-15 NIL declares that Maggi noodles are safe for consumption citing test results from 3 labs mandated by Bombay High Court Nov-15 NIL commences rollout of Maggi instant noodles through online and offline channels Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Nestle SA 3-Jun-17 34.28 33.1. 2 Maggi Enterprises, Ltd. 3-Jun-17 28.48 27.5. 3 Life Insurance Corporation of India 3-Jun-17 4.7 3.9.4 4 ARISAIG Partners (Asia) Pte. Ltd. 3-Jun-17 1.37 1.3 -.5 5 Stewart Investors 31-May-17 1.15 1.1. 6 Aberdeen Asset Management (Asia) Ltd. 3-Jun-17 1.1 1. -.3 7 SBI Funds Management Pvt. Ltd. 3-Jun-17.87.8. 8 First State Investments (Singapore) 3-Nov-16.84.8 -.3 9 The Vanguard Group, Inc. 3-Jun-17.78.7. 1 BlackRock Institutional Trust Company, N.A. 3-Jun-17.69.7. Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Promoter 62.8 62.8 62.8 62.8 62.8 FII 14.9 14.8 13.9 13.2 13.2 DII 6. 5.9 6.7 7.4 7.1 Others 16.4 16.5 16.7 16.6 16.9 Buys Sells Investor name Value Shares Investor name Value Shares Life Insurance Corporation of India 44.59m.43m ARISAIG Partners (Asia) Pte. Ltd. -53.15m -.51m First State Investments (U.K.) Ltd 7.63m.8m Aberdeen Asset Management (Asia) Ltd. -35.96m -.34m BlackRock Institutional Trust Company, N.A. 3.4m.3m PineBridge Investments Asia Limited -22.6m -.25m Stewart Investors 2.58m.3m RBC Investment Management (Asia) Ltd. -9.3m -.1m Sundaram Asset Management Company Limited 1.75m.2m ICICI Prudential Asset Management Co. Ltd. -9.56m -.9m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 5
Financial summary Profit and loss statement Crore (Year-end December) CY15 CY16 CY17E CY18E Total operating Income 8175.3 9474.6 185.3 12266.5 Growth (%) -17. 15.9 14. 13.5 Raw Material Expenses 2,92.6 3,882.8 4,528. 5,19.2 Employee Expenses 912.8 91.6 1,38.6 1,195.1 Marketing Expenses 934.... Administrative Expenses 922.7 41.8 42.9 48.8 Other expenses 851.4 2,295.5 2,619.9 2,951.1 Total Operating Expenditure 6,541.4 7,121.6 8,229.4 9,214.2 EBITDA 1,633.9 2,19.7 2,157.2 2,576.7 Growth (%) -21.2 23.6 6.8 19.4 Depreciation 375.5 365.5 343.5 364.3 Interest 3.3 9.9 1.9 112.9 Other Income 11.1 15.9 127.6 139.5 PBT 1,314.5 1,682.8 1,88.6 2,25.8 Others 5.8 137.5.. Total Tax 25.4 544. 56.7 683.8 PAT 563.3 1,1.4 1,247.9 1,522. Growth (%) -52.5 77.8 24.6 22. EPS ( ) 58.4 13.9 129.4 157.8 Cash flow statement Crore (Year-end December) CY15 CY16 CY17E CY18E Profit after Tax 563.3 1,1.4 1,247.9 1,522. Add: Depreciation 375.5 365.5 343.5 364.3 (Inc)/dec in Current Assets -467.6-413.5 222.2-395.8 Inc/(dec) in CL 125.7 151.5-279.5 116.9 CF from operating activities 596.9 1,14.9 1,534.1 1,67.4 (Inc)/dec in LT loans & adv -.5-4.6 2. 2. (Inc)/dec in other investments -37.3-132.5.. (Inc)/dec in Fixed Assets -82.7-154.5-4. -4. Others 158.7 356.3 6. -375. CF from investing activities 38.2 64.7-32. -755. Issue/(Buy back) of Equity.... Inc/(dec) in loan funds 1.3 16.4. -17.7 Dividend paid & dividend tax -563.3-731.1-1,157. -1,33.6 Inc/(dec) in Sec. premium.... Others -19.4.4.. CF from financing activities -581.3-714.3-1,157. -1,348.3 Net Cash flow 53.8 455.2 57. -495.9 Opening Cash 445.8 499.6 954.8 1,11.9 Closing Cash 499.6 88. 1,11.9 515.9, Balance sheet Crore (Year-end December) CY15 CY16 CY17E CY18E Liabilities Equity Capital 96.4 96.4 96.4 96.4 Reserve and Surplus 2,721.4 2,917.3 3,83. 3,274.4 Total Shareholders funds 2,817.8 3,13.7 3,179.4 3,37.8 Total Debt 16.8 33.2 33.2 15.5 Deferred Tax Liability 172.9 154.2 114.2 222.7 Long Term Provisions 1,597.2 1,972.2 2,72.2 1,588.7 Total Liabilities 4,64.7 5,173.3 5,399. 5,197.6 Assets Gross Block 5,117.4 5,26. 5,56. 5,86. Less: Acc Depreciation 2,219.5 2,53.5 2,874.1 3,238.4 Net Block 2,897.9 2,729.5 2,685.9 2,621.6 Capital WIP 23.8 188.2 288.2 388.2 Total Fixed Assets 3,128.6 2,917.6 2,974.1 3,9.8 LT Loans & Advances 13.4 135. 115. 95. Inventory 82.8 943.2 1,147.3 1,336.4 Debtors 78.4 97.9 147.1 233.9 Loans and Advances 88.4 57. 132.4 15.3 Current Investments 997.9 1,3.9 75.1 852. Cash 499.6 88. 1,11.9 515.9 Total Current Assets 2,485. 3,279. 3,188.7 3,88.5 Creditors 749. 799.2 735.4 768.4 Provisions 265.3 32.7 25.9 233.9 Other Current Liabilities 466.9 512.8 411.8 467.7 Total Current Liabilities 1,481.2 1,632.7 1,353.2 1,47.1 Net Current Assets 1,3.9 1,646.3 1,835.5 1,618.5 Application of Funds 4,64.7 5,173.3 5,399. 5,197.6 Key ratios (Year-end December) CY15 CY16 CY17E CY18E Per share data ( ) EPS 58.4 13.9 129.4 157.8 Cash EPS 97.4 141.8 165.1 195.6 BV 292.2 312.6 329.7 349.6 DPS 48.5 63. 1. 115. Cash Per Share 23.2 262.4 298.1 335.9 Operating Ratios (%) EBITDA Margin 2. 21.3 2. 21. PBT / Net Sales 1. 16.4 16.8 18.1 PAT Margin 6.9 1.6 11.6 12.5 Inventory days 36.9 36.6 39. 4. Debtor days 3.5 3.8 5. 7. Creditor days 33.7 31. 25. 23. Return Ratios (%) RoE 32.3 36.2 39.3 45.2 RoCE 29.7 34.9 36. 45.3 RoIC 32.5 4.3 44.2 51.5 Valuation Ratios (x) P/E 113. 63.6 51. 41.8 EV / EBITDA 38.7 31.1 29.1 24.5 EV / Net Sales 7.8 6.7 5.8 5.2 Market Cap / Sales 7.8 6.8 5.9 5.2 Price to Book Value 22.6 21.1 2. 18.9 Solvency Ratios Debt/EBITDA.... Debt / Equity.... Current Ratio 1.3 1.5 1.6 1.8 Quick Ratio.8.9.8.8. ICICI Securities Ltd Retail Equity Research Page 6
ICICIdirect.com coverage universe (FMCG) CMP M Cap EPS ( ) P/E (x) Price/Sales (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E Colgate (COLPAL) 1,94 1,15 Hold 29,456 21.2 23.4 28.6 51.5 46.8 4.2 6.6 6.4 5.6 64.1 66.7 69.5 45.3 46.7 48.8 Dabur India (DABIND) 3 32 Hold 53,925 7.2 7.4 8. 41.4 4.3 4. 7. 6.5 6. 28. 25.5 25.4 26.4 23.3 22.5 GSK CH (GLACON) 5,296 5,96 Buy 22,394 156.1 167.2 186.2 33.9 31.7 32. 5.1 4.7 4.3 3.8 28.9 29.8 21. 2.2 2.7 Hindustan Unilever (HINLEV) 1,18 1,18 Hold 248,832 2.8 25.1 28.1 56.7 47. 42.1 7.3 6.7 6.1 74.9 91.1 87.6 66.6 76.2 72.1 ITC Limited (ITC) 281 32 Buy 35,513 8.4 8.9 9.9 33.5 31.6 32.3 6.4 5.7 5.3 32.9 31.6 34.3 22.5 21.9 23.8 Jyothy Lab (JYOLAB) 378 37 Hold 7,88 11.1 9.8 1.6 34. 38.6 34.9 4.2 4. 3.5 28.1 24.5 27.6 3.9 25.3 25.1 Marico (MARLIM) 316 34 Hold 42,16 6.3 6.9 8.5 5.3 46.1 4.1 7.1 6.3 5.5 44.6 42.8 46.2 34.9 33.8 36.8 Nestle (NESIND) 6,63 7,6 Buy 65,427 13.9 129.4 157.8 63.6 51. 48.2 7. 6.1 5.4 34.9 36. 45.3 36.2 39.3 45.2 Prabhat Dairy (PRADAI) 133 145 Buy 1,281 4.8 6.3 9.3 27.3 2.8 14.2.9.8.7 8. 9.2 11.6 5.1 6.7 9.6 Tata Global Bev (TATGLO) 194 195 Buy 1,35 7.2 7.8 8.1 27. 24.8 24. 1.5 1.5 1.4 8.8 9.6 9.5 7.2 7.8 7.8 VST Industries (VSTIND) 2,692 3,45 Buy 4,68 13.8 123.1 143.6 25.9 21.9 24. 2. 1.9 1.7 43.7 46.4 48.5 29.9 32.5 34.4 ICICI Securities Ltd Retail Equity Research Page 7
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 8
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