Update on the Indian Equity Market:
On Friday, Nifty ended 0.7% higher at 12,859. The top gainers for Nifty 50 were Bajaj Finserv (+9.3%), Titan (+5.4%), and GAIL (+4.0%) while the losing stocks were Reliance (-3.7%), Adani Port (-1.6%), and IndusInd Bank (-1.5%). Top gaining sectors were Financial Service (+1.7%), IT (+1.4%), and FMCG (+1.2%) while top losing sectors are Media (-0.9%), and Pharma (-0.3%).
Edited excerpts of an interview with Mr Suresh Narayanan, CMD, Nestle India Ltd; dated 19th November 2020 from CNBCTV18:
The Company had a good 2Q with 10.2% growth in the top line. This will be the 11th straight quarter of double-digit growth.
The plant utilisation is well over 90% with some restrictions. Manufacturing levels are growing upwards.
For Nestle India, the core elements of their strategy which are 1) penetration linked volume growth and; 2) a strong focus on innovation and renovation remains constant for the upcoming quarters.
The total Distribution infrastructure has opened & continues to be a positive feature.
The Indian economy in recent times is following the theme of the resurgence of Bharat. The Tier 2, 3 & 4 towns and the rural market are doing extremely well.
Urban India is still facing some operating issues but is growing gradually. For Nestle India, it grew by 0.7% in 2Q while rural grew by 1.7%. In 3Q the Company saw urban growth of 6% & rural growth of 12%.
According to Mr Narayanan, the most unfortunate thing that happened during the pandemic was the meltdown of out of home consumption while an enormous surge is seen in at-home consumption. On a positive note, the out-of-home consumption is gradually opening up, and therefore, he sees some balancing in in-home & out-of-home consumption. Thus, the kind of absurd seen in the consumption in some of the categories will start to normalise.
As part of accessing rural India, the Company is taking 3 major steps: 1) improved access points of distribution. Stocking points have been increased to 12,000 from 8,000-9,000 2 years back, 2) carving out the portfolio making it more relevant for semi-urban & rural consumers, 3) Concentrating & establishing a better value & quality in brands as per the consumer’s needs.
The Company has recalibrated the innovation strategy during the pandemic. The Company has launched 60 new products in the last 2 years and 70% of these are successful.
Four big themes of innovation are coming up going forward: 1) better nutrition, 2) immunity-related innovation, 3) will be introducing ‘touchless’ vending for restaurants, and 4) identifying parts of the portfolio which need tweaking.
The Company may enhance nutrition & immunity brands in line with the theme and may also modify the price-value equation of some products.
The food processing PLI opportunity announced by the government is a huge and fantastic opportunity according to him.
Nestle India expects a CAPEX of Rs 2,600 crores to be completed over the next 3-4 years. Capex includes a new factory in Sanand, Gujarat. A substantial part of the CAPEX goes for the Sanand factory set up. The Company plans to invest in coffee, confectionery & dairy business. The higher capacity will have a huge multiplier effect for Nestle India.
Consensus Estimate: (Source: market screener website)
The closing price of Nestle India Ltd was ₹ 17,400/- as of 20-November-2020. It traded at 77x/ 65x/57x the consensus book value estimate of ₹ 225/267/307 for FY21E/ FY22E/ FY23E respectively.
The consensus target price of ₹ 16,855/- implies a PE multiple of 55x on FY23E EPS of ₹ 307/-.
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