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Investors cosy up to Nestle on rising market share, margin expansion

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ET Intelligence Group: Nestle India’s stock gained 6 per cent on Thursday following the company’s strong outlook.

It has been gradually increasing market share across categories along with margin expansion.

In addition, the company’s volume growth was impressive.

The Thursday’s price jump has taken the total gain over the past six months to 52 per cent reflecting investors’ confidence in the company’s growth prospects. The roadmap that the top management created for the Indian subsidiary of Swiss-headquartered Nestle after the Maggi fiasco in 2015 seems to be working.

Analysts that attended the company’s meet on Tuesday said the company’s commentary on strategy and execution was the biggest take away. The company’s strategy can be summarised into two parts.

First, the regional base cluster approach has helped not only in growing the core business but also to aggressively launching new products with regional flavours.

At the same time, its relationships with the trade partners have also rejuvenated, say industry trackers. Second, Nestle adopted a more aggressive strategy of “willing to fail fast” over “first time right”.

This enabled it to bring in new innovative products and change its image from a Noodle and Coffee company.

For instance, it launched 38 new products and discontinued 11 products in the past two months. Although the new products contributed 3 per cent to the revenue in the first half of 2018 (2.5 per cent last year), the share is expected to keep growing in the coming years.

This means, the core business, too, is doing well. The strategies reflect in the company’s growth.

The year-on-year volume growth (company does not share it in the interim results) for the past six quarters was 11.3 per cent, 7.7 per cent, 8.9 per cent, 18 per cent, 6.9 per cent and 11.5 per cent respectively.

Net Sales growth for the latest quarter was 12.2 per cent.

The 400 basis points operating margin before depreciation (EBIDTA margin) jump to 24 per cent resulted in 50 per cent growth in net profit.

Some analysts expect adjusted net profit of Rs 1,750 crore in calendar year (CY) 2018 and Rs 2,000 crore in CY19 compared with Rs 1,350 in CY17 At the market cap of Rs 1.1 lakh crore, the stock is available at 62 times the CY19 earnings.

This compares with the multiples of 67 for HUL and 85 for PG Hygiene Healthcare.




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