Nestle India Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

Global Economy

The global economy surged to an estimated 5.5% growth in 2021 after contracting 3.4 % in 2020 (United Nations World Economic Situation and Prospects 2022). The global GDP in the first quarter was stronger, reflecting continued adaptation of economic activity to the pandemic. Momentum weakened in the second quarter, weighed down by increasing infections in many emerging markets and developing economies (IMF World Economic Outlook 2021).

Advanced economies and many middle-income countries attained substantial vaccination rates, and sizable fiscal support helped cushion some of the adverse economic impacts of the pandemic. However multidimensional challenges confronted the global economy such as subdued employment growth and rising debt levels.

Commodity prices soared in 2021 following the broad-based decline in 2020, with prices of several commodities reaching all-time highs. Global energy prices surged in the second half of 2021, particularly for natural gas and coal, owing to recovering demand and constrained supply. Non-energy commodity prices stabilized.

Global inflation increased to 5.2% in 2021, because of persistent supply chain bottlenecks and rising freight costs across the globe impacting global production and trade, pushing up prices of essential goods. Food prices shot up by 22% in 2021, reaching their highest levels in a decade, with sharp increases in vegetable oils, cereals and dairy prices (FAO, 2021).

The surge in Covid infections in 2021 sapped consumer demand, but to a much more limited degree than the earlier waves (World Bank Report 2022), though emergence of new variants could further impair market confidence and derail economic recoveries.

The pace of global economic recovery is expected to be slow in the near term as recurring pandemic waves disrupt economic activity. The recovery is also at risk from more persistent supply disruptions, inflationary pressures, financial stress and climate-related issues. As the world confronts the pandemic, climate emergency its economic impact is also gaining sharper focus.

Indian Economy

The recovery that has been underway in the Indian economy with the ebbing of the second wave of the pandemic encountered headwinds from a rapid surge in infections in a third wave marked by the rapid transmissibility of the Omicron variant.

Accelerated rates of vaccination and substantially reduced mobility restrictions have improved consumer confidence (Deloitte Insights). Vaccination is important for opening of the economy, and India delivered 157 crore doses that covered 91 crore people with at least one dose and 66 crore with both doses (Economic Survey 2021-2022).

Indias economy rebounded in the July-September quarter of FY 2021-22. GDP grew at 8.4% year on year (YoY) in Q2 FY2021-22, growth was driven by strong exports, because of global economic recovery, and domestic private investment as businesses ramped up production to meet festive demand (Deloitte Insights, 2022). In September 2021 rural consumption in the FMCG sector increased 58.2% YoY, twice as high as the increase in urban consumption of 27.7% (IBEF, 2021).

Indias Consumer Price Index inflation stood at 5.6% YoY in December 2021. RBIs consumer confidence survey on both the present situation and future expectations suggests sustained uptick in consumer sentiment. Private consumption is poised to see stronger recovery with rapid coverage in vaccination and faster normalisation of economic activity.

India has taken an important step by committing to reaching net-zero emissions by 2070 and reducing the carbon intensity of the economy by 45 % by 2030 (PIB, November 2021)

Opportunities and Risks

With the environment, economy, technology and society undergoing radical shifts, their impacts continue to challenge businesses and create risks and tensions, and opportunities for change and renewal.

Risks

Supply chain challenges

The worldwide supply chain continues to be affected by challenges relating to the COVID-19 pandemic, including delays and disruption. Organizations need to reimagine and manage their supply chains differently to ensure business continuity and growth for the future and provide new solutions for customers to access products and services.

Digital vulnerabilities

There has been a growing dependency on digital systems which has been intensified during COVID19, with increased usage of digital tools and digital payments, adoption of platforms and devices that allow sensitive data to be shared with third parties - cloud service providers, data aggregators, application programming interfaces and other technology-related intermediaries. Additionally, there has been an increase in cybersecurity threats such as malware and ransomware attacks, misinformation and frauds creating cyber risks for the business.

Climate change continues

The economic crisis created by the COVID-19 pandemic could further delay efforts to tackle climate change. Complete climate inaction could lead to losses projected at 18% of global GDP, with different impacts across regions (Swiss Re Institute). Consequences may be irreversible for the environment, humankind, and economic activity

Opportunities

The Indian food processing industry has tremendous growth potential. The COVID-19 pandemic led to increased acceptance for processed food (KPMG 2021). Rural areas and Tier 2 and 3 cities are expected to continue driving the demand for processed food.

Investing in Innovation

Food companies need to continue to leverage their in-depth knowledge of food habits, nutrition, quality and safety in order to innovate and renovate, and adapt to this new normal. They must respond to new demands, reset defining relationships with consumers and reconsider their product portfolio in the post-COVID era to make products healthier, and allow consumers to make informed choices.

Buttressing E-commerce to fuel growth

E-commerce had an increasing impact on the FMCG industry globally during the pandemic as consumers increased their online shopping. As COVID-19 changed consumer habits, FMCG firms saw a surge in the contribution of e-commerce to their overall sales during Covid waves, and stabilization at higher levels as waves receded.

Enhancing digital first with a human touch

Consumers have become more digitally active. According to McKinsey, the COVID-19 pandemic has fundamentally changed the pace of business, and the companies with superior technology capabilities had significant advantage. To meet new demands, companies are making digital, and technology investments, across the business model. To enhance digital experience of the future and enable it to blend with the physical experience, businesses will have to focus on making consumer experience more authentic, more human. This would mean bringing elements of tactile experience (touch, see, feel, smell, taste) as well as making digital interactions more authentic by including multilingual capabilities for wider customer reach and acceptance.

Accelerating sustainability and committing to planet

Addressing climate change will require a multi-stakeholder approach to collaborate and monitor progress, laying the foundation for a better world. This includes regenerative agriculture practices, a transition to 100% renewable electricity, as well as reformulating products to make them more sustainable. There is a need for accelerating actions towards reducing greenhouse gas emissions, creating more recyclable or reusable packaging products.

Quality and Safety

Your Company across all its factories introduced life-saving rules. Safety is a priority for your Company and it has been taken into account right from design stage to ensuring world class equipment, to ensure a safe workplace. Best in class ring-lock scaffolding has been deployed which has not only ensured quick turnaround time but also taken the safety of civil construction several levels higher. Across all operating sites, "Line of risk" training has been deployed to increase people awareness to prevent any body parts in line of any energy, which can cause harm in any way.

Environment Sustainability

Reduction in Energy water usage, wastewater and direct Green House Gas Emissions

Your Company has sustainability as part of its DNA. The focus continued on improving operational efficiencies by reducing consumption of natural resources and reduction in energy and GHG emissions.

From 2006 to 2021, for every ton of production, your Company reduced the usage of energy by around 43%, water usage by around 52%, generation of wastewater by around 67% and specific direct GHG emissions by 57%.

Investing in Renewable Energy

Your Companys key renewable energy projects contributed to GHG savings. This was implemented through the higher purchase of solar power for the Choladi factory and Nanjangud factory and replacement of fossil fuel with clean fuel for steam generation at the Bicholim factory.

Packaging and Plastic Waste Management

Your Company will be annually eliminating 30 million plastic straws. These paper straws are responsibly sourced from renewable sources and certified by the Forest Stewardship Council (FSC). This transition has also been incorporated for the packs of NESCAFE range of cold coffees.

EPR (Extended Producer Responsibility) Initiative

Your Company engaged with various waste agencies, for end- to-end management of plastic waste. In 2021, your Company achieved EPR of 23,600 MT tonnes through plastic waste management.

Nestle a+ brand collaborated with Tetra Pak to launch Cartons to Classroom, an initiative to increase awareness about recycling in India by converting used beverage cartons to create classroom furniture for schools for less-privileged children.

Sustainable Logistics

Your Company is one of the pioneers to transport consumer goods through railways and has initiated 4 inland waterways for strengthening sustainable logistics.

Cautionary Statement

Statements in this Report, particularly those which relate to Management Discussion and Analysis as explained in the Corporate Governance Report, describing the Companys objectives, projections, estimates and expectations may constitute forward looking statements within the meaning of applicable laws and regulations. Actual results might differ materially from those either expressed or implied in the statement depending on the circumstances.