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Equitymaster India

Equitymaster

Nestle India is the third largest FMCG company in India after Hindustan Unilever and ITC. It dominates the culinary (Maggi) and the hot beverages (coffee - Nescafe) segments in India. It also has a significant presence in baby foods and has emerged as a strong No. 2 player in the dairy segment (after Amul) and chocolates (after Cadbury’s). In each of the segments, the company has been growing through new product launches and new price point presence. In the past 5 years, Nestle’s topline and net profits have recorded a CAGR of 15% each.

For 1HCY09, the topline grew by a strong 16% YoY as sales improved across most categories and channels. In the half year period, the domestic segment grew by 19% YoY, while exports fell by 14% YoY. The company continues to ride on the urban growth story aided by product development, innovation and renovation. The operating margins remained stable due to operating efficiencies. Excluding the extraordinary item, the bottomline in 1HCY09 grew by a 28% YoY due to lower raw material costs.

Nestle has ear marked a capex of Rs. 6 bn in FY09 towards expanding its chilled dairy portfolio, capacity expansion at its existing manufacturing facilities in Moga (Punjab) and Samalkha (Haryana), sprucing up its distribution network and new R&D. The company is also considering a re-entry into the water business by acquiring an existing brand. The food processing business in India is at a nascent stage. Currently, only about 10% of the output is processed and consumed in packaged form thus highlighting the huge potential for growth. Existing markets are not fully tapped and the company can increase presence by penetrating further. With India's demographic profile changing in favour of the consuming class, the per capita consumption of most FMCG products is likely to grow.