Stock Review: NESTLE INDIA

Despite a challenging cost environment, Nestle India's presence in high-growth categories where the competition is moderate helped it to report strong performance in 2010. The company plans to introduce more products at various price points and its expansion drive is also well on track. These are expected to help it maintain its growth momentum in 2011-12 also.

To double sales by 2014, Nestle India undertook capital expenditure of Rs 450 crore in 2010, nearly two times its capex in 2009. The company received $450 million in debt funding from the parent company for the expansion, which will be completed by 2013 in a phased manner.

In 2010, Nestle reported a y-o-y domestic sales growth of 23%. Its volumes grew 17.6%, supported by a bigger product portfolio and wider reach. The highest volume growth was in the premium segments such as prepared dishes (27%) and chocolates & confectionaries (21%). Other business segments include milk product, beverages and nutrition. The company has been trying to aggressively expand its reach. In 2010, it added 464,000 new points of sales. In the coming years, it intends to focus on its penetration in tier-II, III and IV towns to support the additional production volume from the new capacities. Nestle's key raw materials include commodities such as palm oil, milk and coffee. Despite the increase in its commodity cost index by 10% last year, the company maintained operating margin at close to 20%. However, its profitability could come under pressure due to the continued upward trend in inflation. The prices of some of the inputs have shot up by 10-20% since the beginning of the current year. Also, the levy of 1% excise duty on processed food items, such as tomato ketchup and pasta, may have a marginal impact on Nestle.
Though the high input cost remains a challenge, the company's margin is not expected to fall below 17-18%. Considering the rising consumer demand for premium products, the company's plan to enhance its premium product portfolio may help it restrict the fall in margin.

Good demand for its products, timely capacity expansion and product introductions would be critical for its long-term growth.