Nestle India: Penetration-led growth but lacking innovation

26 Oct 2023 , 10:47 AM

Recommendation: Add; Target Price: Rs 25000

 

Nestle India has executed its distribution strategy well, which resulted in a robust 11.3% sales Cagr over the past four years (2018-22). In the past few quarters, Nestle’s growth has been largely driven by a higher pricing growth that is expected to anniversarise in the coming quarters. Moreover, with nearly 0.2mn villages covered, distribution seems to have limited scope for growth. Maintain ADD; TP of Rs25,000. 

RURBAN expansion driving growth: 

Nestle has increased its rural reach, in terms of total villages covered from 68,578 in CY20 to 191,395 in H1CY23. This has led to a 26.6% 3yr Cagr in sales from villages (vs 10.9% overall sales Cagr). The penetration is low in the rural areas vs urban areas; increasing rural penetration remains a key focus. Currently, the total addressable market (TAM) for Nestle stands at 487mn consumers, which is expected to go up to 700mn by 2030. With investments behind distribution infrastructure in recent years, trusted brands and superior products Nestle is well poised to benefit from the increase in this TAM. 

Innovation rate to improve: 

Over 125 products were launched in the last seven years, which contributed to ~6.1% of the total sales in M9CY23. However, focus was more on driving the core and distribution expansion. Management is now in a better position to focus on driving innovations and aims to increase the contribution of new products to ~10% in the coming years. Integration of the petcare business with the domestic entity is largely complete and the company is well poised to realise immediate synergies from this business. 

Focus on penetration-led volume growth: 

The overall sales growth in M9CY23 at 15.2% has been primarily driven by pricing, with tonnage growth at ~2%. While most commodity prices have stabilised, green coffee and packaging products may remain volatile. The company aims to focus on penetration-led volume growth in the medium term.