Nestle India Defied The Slowdown. Here’s How…

When its peers saw volume growth ease as Indians consume less in a slowing economy, Nestle India Ltd. stood out.

The maker of Maggi noodles and Nescafe instant coffee has grown faster than most other consumer goods makers in the first half of the current year and even in 2018. That, according to analysts, has been aided by a nuanced distribution approach giving market share leadership, aggressive advertising spends to support new launches and expansion in portfolio.

Investors and analysts have reposed faith. More than 96 percent of the analysts tracked by Bloomberg have a buy on the stock with a 12-month return potential of nearly 29 percent. Shares of the company have jumped 15 percent so far this year, returning twice the gains compared with the industry benchmark Nifty FMCG Index.

Here’s what’s going in favour of Nestle:

Steady Growth In A Slowing Market

An aggregate growth of the eight largest fast-moving consumer goods makers with at least Rs 30,000 crore market value fell quarter-over-quarter in the three months ended June. Nestle India and Dabur India Ltd. bucked the trend.

Nestle India, in an analyst meet last week, said its volumes rose 10.8 percent in the first six months of calendar year 2019. Its premium segment, which contributes 12 percent to its revenue, grew 21 percent during the period.

Nestle India has consistently outpaced most peers since 2016 after it recovered from the Maggi fiasco over levels of monosodium glutamate. The instant noodles cleared all safety tests.

Nuanced Distribution Strategy

The company has divided its market into 15 clusters or regions, and changed its product mix, pricing and pack size for each area. That helped it retain its dominance in market. According to CLSA, the company is leveraging digital technology and analytics in the trade channels, driving efficiency promotions, sales route and merchandising.

Nestle India said in its annual analyst meet that it cut distribution centres from 37 to 29 and will further optimise the structure to lower costs.

More Product Launches

Nestle India has launched more than 60 products over the last three years, diversifying its portfolio since the Maggi fiasco. Along with new variants in deeply established brands like Maggi, Nescafe and Kit Kat, it ventured into breakfast cereals, tea pre-mixes and organic baby food. More recently, it re-introduced cocoa malt beverage Milo, a decade after withdrawing it as it had failed to compete.

The timeline for new product innovations has reduced to three to nine months from 18 months before 2016, the company said. And the pace increased in the last few quarters. According to Motilal Oswal Securities, Nestle India is launching one-two products every month on an average.

According to the company’s management, seven of the 10 new launches—including its breakfast cereals brand NesPlus, new ‘Munch’ coated-wafer range and Maggi Nutri-Licious noodles—have turned out to be successful against industry-wide success rate one-two of 10.

Motilal Oswal said new launches contributed 3.7 percent to the revenues in the first six months of calendar year 2019, and this can only rise.

Aggressive Advertising Spends

The company has been spending aggressively to support new launches. The marketing expenditure rose 18.5 percent year-on-year to Rs 470 crore in the first half of 2019, according to its filings. Advertising spend as a ratio to revenues rose to 7.8 percent from 7.2 percent a year earlier. This is when peers in the food sector like Hindustan Unilever Ltd. and Dabur cut marketing expenditure.

Britannia does not report ad spends but its management said in the earnings call that the company remains aggressive in its promotion costs despite the slowdown.

Higher spending during a consumption slowdown may impact profitability, according to Morgan Stanley, which maintains ‘underweight’ rating on Nestle India. Along with high ad spends, the company will have to improve pricing to avail best value for its products, it said. “This comes against structural growth headwinds in the core portfolio including infant nutrition, dairy, chocolates and beverages.”

Fresh Capex

Still, a slowing economy failed to deter the company from announcing fresh investments. Nestle India will spend Rs 700 crore investment to build new manufacturing facility, its ninth in the country, for its Maggi noodles to soups in Sanand, Gujarat. That underscores the its confidence on long-term demand.