Nestle India’s growth focus is good, but stock is already costlier

Nestle India held an analyst meet last week and provided an update on its business. Among segments, milk products and nutrition increased 8.9% and accounted for 45.8% of overall sales. Prepared dishes and cooking aids rose11.4% and contributed 30% of sales

The packaged foods company is has over 40 new innovation projects in the pipeline. Over the last five years, Nestle India has had more than 80 new products launches. These have helped improve new product sales contribution to overall domestic sales to 4.3% in calendar year 2020. In 2016, this measure stood at 1.5%. The company follows a January to December accounting year.

Going ahead, input price inflation remains a key concern for Nestle. Milk prices rose 7% year-on-year in 2020 while those of skimmed milk powder (SMP) jumped 25%. “Input price inflation is visible but Nestle enjoys pricing power, in our view,” said analysts from Jefferies India Pvt. Ltd. The broking firm added, “The company is under-indexed in rural which offers growth headroom through distribution & SKU expansion.”

In 2020, Nestle India’s domestic sales volumes rose 5.7% on year. Domestic sales growth last year stood at 8.5% year-on-year. E-commerce contribution to domestic sales increased to 3.7% in 2020 from 1.9% in 2019.

Among segments, milk products and nutrition increased 8.9% and accounted for 45.8% of overall sales. Prepared dishes and cooking aids rose11.4% and contributed 30% of sales. Performance of this segment was below expected for some analysts.

“Though the 11.4% growth in prepared dishes (Maggi) in CY20 was healthy, it was lower than our earlier estimate due to in-home consumption getting a boost during covid. Performance was likely affected by a slower resumption in manufacturing as Nestlé does not outsource production,” said analysts from Motilal Oswal Financial Services Ltd in a report on 27 February.

Meanwhile, analysts have a positive view on the company’s capex plans. “Recent capex increase (Rs2600 crore planned over CY20-23 which is equal to the cumulative capex of CY12-19) also points to a strong growth trajectory – first phase to be commissioned by CY2021-end,” pointed out ICICI Securities Ltd in a report on 27 February. The broking firm added, “Our primary research indicated likely lower birth rates in CY21, a potential headwind for the infant nutrition segment.”

To be sure, valuations of Nestle India’s shares are not particularly cheap. The stock trades at about 58 times CY22 Jefferies’ earnings per share estimates.