The Hindu Business Line : Nestle India: Buy

The Nestle India stock is an attractive investment option for investors with a two-three year perspective. With a brand portfolio that straddles high-growth FMCG segments such as infant foods, dairy, beverages and processed foods, Nestle India enjoys strong pricing power and faces relatively low competition in the categories where it operates. At the current market price, the stock trades at a PE multiple of about 23 times expected earnings for 2009. While this is at a premium to the market, it appears justified in light of Nestle’s superior growth prospects and similar valuations enjoyed by peers such as Hindustan Unilever and Dabur India.

Nestle India’s brand portfolio appears best positioned among listed FMCG companies to capture the rising urban spends on health products and convenience foods. ; this appears to have reached an inflexion point. Dairy, infant foods and prepared dishes contribute about two-thirds of the sales, while beverages and confectionery account for the rest. Each of these categories carry significant room for market expansion and given the breadth of Nestle’s brand portfolio, offers scope for sustained double-digit growth in sales over the next few years.

Nestle India appears to be capitalising on this opportunity by expanding its brand portfolio through new launches in dairy products (probiotic and low fat dahi, milkshake and fruit yoghurt), prepared foods (Maggi Healthy Soups, Rice Noodles) and beverages (Nescafe Mild and an expanding chain of vending machines). The topline growth climbed to 25 per cent in the first nine months of 2007, from the low double digits managed for several years. The wide repertoire of brands and presence in the under-penetrated segments also shield it from the bruising competition being witnessed in mature FMCG segments such as personal care or shampoos. The company’s low adspend-to-sales ratio (less than 5 per cent, compared with 8-12 per cent for peers) reflects low competitive intensity.

An inflationary environment for inputs such as milk, wheat and coffee over the near to medium-term does pose a risk to margins. However, considerable room for price increases in the product categories, declining tax incidence and accelerated topline growth may still help drive a healthy pace of profit growth over the next three-four years.

Aarati Krishnan

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