Maggi, e-com sees sharp pick-up, CLSA says Nestle can return to double digit growth

CLSA maintains an outperform rating on Nestle with a target of Rs 17670. They think Nestle will return to double digit growth momentum soon. Innovation will likely to remain constrained in current scenario and peak capacity utilisation may constrain near term demand support. Nestle is well placed to address long term packaged demand post capacity augmentation.

Jefferies maintains a hold rating on Nestle India with a target of Rs 17350. Jefferies thinks key takeaway from Nestle's analyst meet delved into the severe disruption faced during the lockdown and the organization's response to come out of it. The company is back on a growth trajectory with double digit growth across key brands in Q2. Innovations continue to be a key growth driver and so will be distribution & emerging channels (like e-comm). Recent trend on input prices is stable. Management's positive outlook is evident from Rs 26 bn capex plan in the next 3-4 years.

Lockdown disruptions:

Nestle elaborated on severe supply chain constraints faced in the June quarter, as lockdown reduced manpower availability in factories and curtailed utilisation to 75%. Being a multi product company with several input raw materials further exacerbated challenges. Distribution also took a severe hit with access to market down 40-50% in April, followed by a gradual recovery in May/June. Put together, this resulted in a weak 2% growth.

Strong recovery:

With restrictions easing, Nestle saw a strong recovery to double digit growth. Secondary sales have performed even better with August revenue 15% higher than pre-Covid (Feb-20). Rural growth was at 2x of urban growth.

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Category trends:

a) Milk products and Nutrition grew the fastest at 10%
b) Prepared dishes grew 8%, the portfolio was disrupted the most during the lockdown, albeit has recovered sharply with 19%
c) Confectionary grew 5%, supply chain disruption was followed by a recovery led by KitKat / Munch brands
d) Beverages grew 1.4%, this was mainly due to pressures in out of home channels as in home saw a 12% growth.

Margins:  

After high inflation in milk and wheat, there has been some moderation in the last two quarters. GM was up 60 bps YoY, after six quarters of decline. This, along with growth acceleration, could provide some margin upside.

New channels:

E-commerce revenues more than doubled YTD and the channel now accounts for 3.4% of revenues. In out of home, Nestle has introduced a one of its kind contactless vending machine.

Gains in Maggi:

With supply chain issues resolved, Maggi has seen a sharp pick-up in growth (+19%). Growth has been led by an increase in penetration, with 9 mn households added to noodles, +1 mn in sauces and +1.6 mn in Masala-e-Magic.

Innovations:

Innovation did take a back seat recently, as the focus was on restoring core business. Nonetheless, new products remain an important growth driver with recent launches being NesPlus Crunchy Flakes, Koko Krunch, Upma and Poha under Maggi. Three new variants have been introduced in Maggi Noodles and a new category of Fried Rice Seasoning is also being piloted. On the whole, new launches contributed 3% to revenues. Innovations would ramp up going forward, with focus on new consumer trends - health, wellness, convenience, value, etc.

Capex:

Existing facilities are operating at 80-90%+ utilisation and hence Nestle is embarking on a large Rs 26 bn capex plan. While this would dent return ratios in the near term, management is confident of demand opportunity going ahead.
 
Nestle India - Re-setting for accelerated growth

Antique stock broking maintains Nestle India as their Top pick in FMCG sector, with a target price of Rs 19020. Nestle India is poised to witness sustained healthy growth backed by a consistent 7-9% growth in milk and nutrition (against 4-5% growth earlier) and double-digit growth in the rest 53-55% of the business, through scale up of operations. From the management interaction, Nestle India's distribution has recovered to pre-Covid levels during August and September. Importantly, the company has improved its distribution reach in smaller towns during the last two last months of the quarter. The key driver of sales has been rural markets while urban demand too has witnessed some recovery. Additionally, growth in sales was led by Prepared dishes and cooking aids followed by Milk and nutrition.

Chocolates and confectionaries have witnessed some recovery during the quarter while Beverages was affected by drop in out of home consumption. Notably, the better growth in Milk and nutrition is led by product extensions/stage additions (Cere grow, Nan grow etc). The company continues to focus on product introductions, across its categories to maintain the momentum of activations in the trade channel and create growth drivers of the future. On the profitability front, the management is confident of managing headwinds from any inflation in wheat prices and is focused on cost rationalizations through initiatives like Project Shark. The Rs 26 bn investment planned will enhance capacity across its product segments. Antique continues to believe that the company is setting the platform for a healthy double-digit growth in revenue during the next 5 years