How Nestle India Outperformed FMCG Peers In Second Quarter

Nestle India Ltd.’s revenue grew the most in the quarter ended September among consumer goods makers on the back of new product launches, trumping even slowing consumption in India that’s affected everyone from the makers of cars to soaps.

The maker of Maggi instant noodles and Kit-Kat chocolate’s revenue rose 8.8 percent in the three-month period, it said in an exchange filing. That’s higher than the growth by India’s largest consumer goods maker Hindustan Unilever Ltd. and Britannia Industries Ltd.

The domestic market contributes around 90 percent to Nestle India’s overall revenue, which grew 10.5 percent over the previous year. Exports to countries, including Turkey, contributes the rest.

Growth was driven by key brands such as Maggi, Kit Kat and Munch, the company said in a statement accompanying the earnings. Nescafe instant coffee and the infant formulae Nangrow and Ceregrow, too, contributed to growth, it said.

The company has been focused on increasing revenues and has launched a slew of products, which has contributed to growth at a time most of its peers are facing pressure, CLSA said in a recent report. Edelweiss said the company’s focus on innovating products and premiumisation has been a catalyst.

60 Products In 3 Years

Nestle India launched nearly 60 products over the past three years, including variants of its deeply established brands Maggi, Nescafe coffee and Kit Kat. It entered the breakfast cereal, tea pre-mixes and organic baby food segments in this period. The company re-introduced its cocoa malt beverage Milo nearly a decade after it withdrew from the market.

The company has started to launch one-two products every month on average, according to Motilal Oswal. And the company claims that seven of its 10 new launches have turned out to be successful against the industry success rate of one-two out of 10. Nestle India’s peers such as HUL, Britannia or ITC have neither had as many launches nor that kind of success rate over the last few quarters, the company filings indicated.

Growth Over Margins?

Nestle India’s products are “arguably more discretionary than several of its peers” and yet it has outperformed in the sector, according to CLSA. But that has come at the cost of contraction in operating margins largely on the back of rising prices of milk and related derivatives. That implies the company chose against making large changes in pricing despite rising costs to hold on to growth.

In comparison, Britannia hiked product prices to pass on the rising costs of flour and milk derivatives to consumers. HUL and ITC, however, face a benign input cost environment as their exposure to milk derivative inputs remain relatively minimal.

Cluster Approach To Distribution

The company’s cluster-based approach has been contributing to better-than-expected growth, Edelweiss said. The company, the brokerage said, divides its domestic business into 15 clusters, encouraging local autonomy in decision-making and facilitating better tracking. This will enable Nestle India to grow stronger and better and drive a deeper consumer-connect, Edelweiss said.

HUL, too, adopts a similar approach to distribution, ICICI Securities said in a recent report. Britannia, the report said, faces distribution challenges from regional players in north and east India.

Analysts’ Outlook

The consensus target price of analysts tracked by Bloomberg for Nestle India is Rs 14,272 per share—close to its current market price of Rs 14,400.

Nearly 45 percent of analysts have a ‘Buy’ rating with 22 percent indicating ‘Sell’. CLSA, which is ‘underweight’ on Nestle India, said the prospects of packaged food growth remains intact but at 60 times its 12-month forward earnings, “leaves little scope for error.” Morgan Stanley said it’s “underweight on Nestle India expecting near-term headwinds”.

Shares of Nestle India have gained nearly 29 percent so far this year compared with the Sensex’s 12 percent gain.