16 April 2014
Update | Sector: Consumer
Nestle India
BSE Sensex
22,277
S&P CNX
6,675
CMP: INR4,779
TP: INR5,065
Neutral
Domestic volumes subdued; growth at multi-year low
FCF, leverage improve with conclusion of capex program
We analyzed Nestle India's (NEST) annual report for CY13. Our key takeaways:
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
NEST IN
96.4
5,865/4,547
-2/-22/-15
460.8
7.6
Marginal uptick in overall volumes, but domestic volumes flat; revenue growth at
multi-year low.
Volumes declined in Chocolates and Milk Products on low base.
Cash flow ratio (FCF/Sales) improves, as capex program is over.
Given the rich valuations (34.5x CY14E and 29.7x CY15E EPS) coupled with
subdued demand environment, we maintain Neutral.
Domestic volumes subdued; growth at multi-year low
NEST registered volume growth of 1.9% on a base of 0.8%, reflecting the double
whammy effect of slowdown in discretionary segment and the company’s
portfolio optimization strategy. Volume growth in the domestic business was
0.8%. Milk Products (-1.1%) and Chocolates (-2.2%) witnessed volume declines.
Volume growth was relatively better for Beverages (9.3%) and Prepared Dishes
(3.8%). Milk Products contributed 40.9% of incremental value growth while
Prepared Dishes contributed 35.3%. The volume contribution of Milk Products
declined to 30.3% while the contribution of Prepared Dishes grew to 53.5%.
Financial Snapshot (INR Billion)
Y/E Dec
2013 2014E 2015E
Net Sales
90.6 104.4 119.2
EBITDA
Adj PAT
EPS (INR)
Growth (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
19.7
11.6
5.7
55.8
49.4
39.6
19.5
22.5
13.4
15.0
53.1
54.5
34.5
17.3
25.5
15.5
16.1
54.9
64.9
29.7
15.4
120.6 138.7 160.9
245.7 276.3 310.1
Gross margin flat; EBITDA margin declined 20bp
Gross margin stayed flat at 54.3%. Commodity cost inflation offset the product
mix and pricing gains. EBITDA margin declined 20bp, as higher selling and
administrative spends (up 40bp) and staff cost (up 20bp) were partially offset
by lower manufacturing cost (down 30bp). Input cost inflation is a key risk in
CY14. NEST’s commodity cost index was up 3% in CY13 and could increase ~10%
in CY14. Inflation in milk, milk solids and palm oil has risen.
Shareholding pattern (% )
As on
Dec-13 Sep-13 Dec-12
Promoter
Dom. Inst
Foreign
Others
62.8
5.9
13.6
17.8
62.8
6.3
13.0
17.9
62.8
7.2
11.7
18.3
Strong FCF generation; balance sheet turns net cash
With the conclusion of NEST’s capex program, free cash flows and leverage
improved. Balance sheet turned net cash; working capital improved but
dividend payout ratio declined. NEST maintained per share payout at INR48.
Stock Performance (1-year)
Valuations rich; maintain Neutral
NEST’s strategy of aligning resources behind its high margin portfolio is a long
term positive but impacts near-term volumes. Despite a weak base, we do not
expect material improvement in volume growth (channel checks suggest
continued weakness). RM inflation is a key risk to earnings. Rich valuations
(34.5x CY14E and 29.7x CY15E EPS) do not provide any margin of safety.
Maintain
Neutral.
Reversal of urban sentiment, pick-up in the pace of
innovation/new launches are key upside risks to our recommendation.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
Investors are advised to refer through disclosures made at the end of the Research Report.

Nestle India
Domestic volumes subdued; growth at multi-year low
NEST posted revenue growth of 9.3% in CY13 with – 1.9% on volume growth
(0.8% in CY12) and 7.3% on pricing and mix improvement (10.9% in CY12).
Domestic business volumes grew just 0.8%.
Volumes were impacted by channel and portfolio rationalization initiatives as
well as slowdown in discretionary consumption.
Beverages and Prepared Dishes (Maggi) posted volume growth of 9.3% and
3.8%, respectively. Milk Products and Chocolates & Confectionery witnessed
volume decline of 1.1% and 2.2%, respectively.
Milk Products contributed 26.5% of incremental value growth while Prepared
Dishes contributed 33.6%.
The volume contribution of Milk Products declined further to 30.3% while the
contribution of Prepared Dishes continues to move up and now stands at 53.5%.
Sales growth lowest since CY04; volumes flattish on favorable base
Volume Growth (%)
30
20
10
0
-10
CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13
Source: Company, MOSL
14.5
6.6
11.4
4.1
Price Growth (%)
23.9
11.4
11.4
22.6
16.8
Sales Growth (%)
22.1
20.3
11.8
9.3
Management sounds cautious for CY14
“Commodity prices continued peaking with food inflation hitting all time highs,
resulting in high overall inflation, Rupee depreciated significantly before reviving a
little, and the consumer sentiment remained subdued as well.”
“The company believes that this is a temporary phase, though it is possible that
acceleration in growth may take longer than anticipated earlier.”
Rising volume contribution of Prepared Dishes (%)
Milk Products/ Nutrition
Prepared Dishes
12.9
41.1
7.8
38.2
CY08
12.4
43.6
6.5
37.6
CY09
12.8
46.3
6.3
34.6
CY10
Beverages
Chocolate & Conf.
11.8
49.1
6.0
33.2
CY11
10.6
52.6
5.6
31.2
CY12
10.2
53.5
6.0
30.3
CY13
15.2
23.5
17.9
43.4
CY08
Milk Products contribution to revenues declined in CY13 (%)
Milk Products/ Nutrition
Prepared Dishes
14.8
25.6
15.4
44.3
CY09
15.3
27.1
14.1
43.5
CY10
Beverages
Chocolate & Conf.
14.3
28.1
13.9
43.7
CY11
13.6
28.3
13.1
45.0
CY12
13.7
28.8
14.1
43.4
CY13
Source: Company, MOSL
Source: Company, MOSL
16 April 2014
2

Nestle India
Milk Products and Nutrition
New launches and initiatives:
Extending its product portfolio, NEST launched
NAN PRO1
– an infant formula with probiotics. Initial feedback from healthcare
professionals has been good, according to the management. NEST is working on
a pipeline of products with its global R&D team to further consolidate its
position in the Indian market. The company launched a “Superbaby” campaign
to promote breastfeeding during the World Breastfeeding week.
Nestle India’s recent product launches are focused on the nutrition platform
Year
2013
2012
2012
2011
2011
2010
Product
NAN PRO 1
Nestle Baby & Me
Cerelac Shishu Aahar
Nestle a+ Milk
Nestle a+ Dahi
Nestle Dahi in pouches
Source: Company
Volume and sales growth:
The Milk Products and Nutrition segment posted
1.1% volume decline in CY13 v/s 5.1% decline in CY12. Realization grew 6.7% in
CY13 despite higher base (21.4% growth in CY12).
Everyday Dairy Whitener
was
impacted by the overall category slowdown, led by increased liquid milk
availability in the North East. As per management, overall category performance
was impacted by portfolio optimization and weakness in 1/3
rd
of the portfolio.
Contribution to overall volumes and sales:
The contribution of Milk Products to
volumes continued to decline and is now 30.3% (down from 38.2% in CY08). In
revenue terms, category contribution declined 160bp to 43.4% v/s 45% in CY12.
Milk Products posted another year of volume decline in CY13
Volume Growth (%)
30
20
10
0
-10
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
9.4
22.6
23.0
Price Growth (%)
19.2
20.1
20.7
15.2
5.5
Sales Growth (%)
Source: Company, MOSL
16 April 2014
3

Nestle India
Coffee and Beverages
New launches:
NEST introduced a new customized variant of
Nescafe
in Andhra
Pradesh,
Sunrise Strong.
Volume and sales growth:
The Coffee and Beverages segment posted 9.3%
volume growth in CY13, the highest in three years. Volume growth was driven
by exports; domestic volumes grew just 3.2%. Revenue grew 17.9%, driven by
pricing/mix improvement (7.9% in CY13 v/s 10.6% in CY12). Both
Nescafe
and
Nescafe Sunrise
posted above category growth and gained market share. NEST is
looking to drive premiumization of this portfolio. It has started distributing
Nestle Milo
in select markets.
Contribution to overall volumes and sales:
Coffee and Beverages contributed
~6% to volumes against 7.8% in CY08 and 14.1% to sales against 17.9% in CY08.
Coffee and Beverages performance was driven by exports
30
20
10
0
-10
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
3.9
Volume Growth (%)
19.4
10.9
0.4
11.8
5.1
Price Growth (%)
18.8
Sales Growth (%)
17.9
Source: Company, MOSL
Coffee category saw 16.6% CAGR over CY07-12
Coffee Market (INR b)
23.3
13.3
15.0
11.9
16.4
Category growth (%)
Nestle gained share in Coffee (% of sales)
Nestle India
Narasu's Coffee Co.
32.6
4.7
30.7
31.6
4.9
30.7
32.8
2009
31.2
5.0
30.7
33.1
2010
Hindustan Unilever
Others
29.0
5.2
31.3
34.5
2011
27.7
5.4
31.0
35.9
2012
13.1
2008
14.7
2009
18.1
2010
20.8
2011
24.2
2012
32.0
2008
Source: Industry, MOSL
Source: Industry, MOSL
16 April 2014
4

Nestle India
Prepared Dishes and Cooking Aids
New launches:
In CY13, Nestle launched
Maggi Hungroo
and
Maggi Magical
Masala Noodles.
The
Maggi Bhuna Masala
range was further extended to
include
Maggi Korma
base and
Maggi Makhni
base.
Product
Maggi Hungrooo
Maggi Magical Masala Noodles
Maggi Healthy Soups
Maaggi Dumdaar Noodles
Maggi Vegetable Multigrainz Noodles
Maggi Nutri-licious Pazzta
Maggi Masala ae Magic
Source: Company
Sustained innovation in the Maggi portfolio to enhance engagement with consumers
Year
2013
2013
2012
2011
2010
2009
2009
Volume and sales growth:
The segment witnessed 3.8% volume growth (8% in
CY12), the lowest in 10 years. During the Analyst Meet, the management had
commented about the higher base and potentially lower volume and value
growth in this category. Additionally, penetration levels have gone up in both
SEC D/E households by 20% in four years.
ITC gained 650bp share in two years (%)
37.8
31.0
25.0
0
0
0
0
0.9
6
9.4
12.5
Nestle
ITC
Nissin
Others
Instant Noodles market doubled in three years
Instant Noodles market (INR b)
19.3
7.3
9.2
11.3
14.4
77.8
79.2
81.1
81.6
78.4
75.9
73.2
70.6
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
Source: Industry, MOSL
Source: Industry, MOSL
Contribution to overall volumes and sales:
The contribution of this segment to
NEST’s business has consistently increased over the years. It contributed 53.5%
of volumes (41.1% in CY08) and 28.8% of sales value (23.5% in CY08).
Prepared Dishes revenue growth has moderated; volume growth lowest since CY04
Volume Growth (%)
35
25
15
5
-5
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
19.2
30.6
34.7
Price Growth (%)
26.9
29.2
Sales Growth (%)
24.9
12.8
11.0
Source: Company, MOSL
16 April 2014
5

Nestle India
Chocolates and Confectionary
New launches:
NEST launched Alpino in the Chocolates and Confectionary
category to drive premiumization. According to the management, the product is
launched in select urban markets and is meeting internal expectations (“neither
a blockbuster, nor a dud”). NEST also expanded its
Munch
offering, with two
new SKUs –
The Nestle Munch 4x4
and a convenient share bag pack.
Volume and sales growth:
The segment registered 2.2% volume decline despite
a low base in CY12, when volumes declined 9.4%. Realization grew 12.4% on the
back of 17.3% in CY12. Portfolio optimization and competitive headwinds
(outspent by competition; share of voice lower v/s share of market)
Contribution to overall volumes and sales:
This segment contributes 10.2% of
volumes against 12.9% in CY08 and 13.7% sales value against 15.2% in CY08.
Chocolates and Confectionary: Another year of volume decline
Volume Growth (%)
30
20
10
0
-10
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
18.5
24.8
19.5
13.6
12.7
6.3
10.0
Price Growth (%)
26.4
Sales Growth (%)
Source: Company, MOSL
Nestle Kitkat ‘Dancing Babies’ campaign the third-most watched TV commercial during
2013 on YouTube in India
Source: Company
16 April 2014
6

Nestle India
Gross margin flat; EBITDA margin declined 20bp
Gross margin
stayed flat at 54.3% in CY13 despite relatively benign commodity
cost inflation (index moved up just 3% in CY13). This is primarily owing to YoY
mix change as growth in Milk Products was lower than in Beverages.
EBITDA margin
declined 20bp, as higher selling and administrative spends (up
40bp) and staff cost (up 20bp) were partially offset by lower manufacturing cost
(down 30bp).
Gross margin stayed flat while EBITDA margin declined 20bp
Gross Margin (%)
EBITDA Margin (%)
54.3
53.0
51.8
20.1
19.5
CY06
CY07
20.2
51.2
20.5
52.1
51.0
20.2
22.3
54.3
22.1
20.7
51.8
CY08
CY09
CY10
CY11
CY12
CY13
Source: Company, MOSL
Capex spends largely over
NEST spent INR1.3b on capex during CY13 (INR6.7b in CY12).
It has expanded its gross block by 2.6x since FY10 to INR49b.
Asset turnover stabilizing (x)
Sales/ Net Fixed Assets (including CWIP)
20.8
4.9
4.3
7.1
6.7
5.3 5.2
5.3
5.0 4.9 5.2 5.0
Capex spends largely over (%)
Capex /sales
4.6
3.0 3.3 2.9 3.5 4.9 5.0 4.8 5.8 5.0
1.3
2.5 2.3 2.5
Source: Company, MOSL
Source: Company, MOSL
16 April 2014
7

Nestle India
Strong FCF generation; balance sheet turns net cash
In CY13, NEST’s balance sheet turned net cash, with the conclusion of its capex
program. While gross debt stood at INR11.9b, net debt was a negative INR1.9b.
Net operating cash flow was up 6% at INR18b.
Working capital ex cash remains negative at INR4.3b (4.7% of sales) v/s INR3b
(3% of sales in CY12).
Free cash flow improvement in CY13 (%)
FCF/Sales
Operating cash flow to total assets in a range (%)
OCF to total assets
Source: Company, MOSL
Source: Company, MOSL
Nestle’s balance sheet turned net cash in CY13 (x)
Net debt/ equity
0.3 0.1
(0.2) (0.3) (0.2) (0.4) (0.3) (0.5) (0.6) (0.5)
0.5 0.2
(0.1)
With significant Free cash flow improvement in CY13
FCF
Source: Company, MOSL
Source: Company, MOSL
Valuations rich; maintain Neutral
The strong growth opportunity in India's processed foods segment and NEST's
ability to capitalize on this, given its leadership position in the core categories in
which it operates, remain unchanged. However, portfolio optimization,
slowdown in pace of innovation coupled with broader market moderation is
impeding near-term performance.
NEST’s strategy of aligning resources behind its high margin portfolio is a long
term positive but impacts near-term volumes. We expect volume growth to
increase to mid-single digits, driven by favorable base, new launches from
expanded capacities as well as introduction of new SKUs from parent's portfolio.
RM inflation is a key risk to earnings. Rich valuations (34.5x CY14E and 29.7x
CY15E EPS) do not provide any margin of safety. Maintain
Neutral,
with a target
price of INR5,065. Reversal of urban sentiment is a key upside risk to our rating.
16 April 2014
8

Nestle India
Comparative Valuations
Sector / Companies
Asian Paints
Britannia
Colgate
Dabur
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Marico
Nestle
Pidilite Inds.
Radico Khaitan
United Spirits
Consumer Sector Aggregate
CMP
(INR)
534
878
1,390
178
845
4,313
606
346
208
4,779
325
123
2,871
RECO
Neutral
Buy
Neutral
Buy
Neutral
Neutral
Sell
Buy
Buy
Neutral
Neutral
Buy
Neutral
EPS (INR)
PE (x)
EV/EBIDTA (x)
ROE (%)
FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E
12.7
15.5
18.6
41.9
34.4
28.7
27.2
22.8
19.0
31.4
32.4
30.8
36.6
43.3
28.5
24.0
20.3
17.9
14.6
12.1
47.3
45.5
35.5
43.6
52.0
39.2
31.9
26.7
27.5
21.4
17.4
88.0
96.3
5.3
6.4
7.5
33.8
27.7
23.8
26.8
21.8
18.6
34.6
34.8
21.6
27.0
33.3
39.2
31.3
25.4
24.6
20.2
16.7
20.8
22.7
119.6 140.1 165.1 36.1
30.8
26.1
33.6
26.5
22.0
31.3
30.9
16.4
18.0
20.2
36.9
33.6
30.0
27.6
24.2
20.8
61.3
57.5
11.0
12.9
14.8
31.6
26.9
23.4
22.3
19.1
16.6
37.9
40.6
7.7
8.4
9.9
27.0
24.9
20.9
18.0
15.2
12.5
29.6
25.0
121.9 143.5 168.8 39.2
33.3
28.3
23.3
19.8
17.1
57.0
53.4
9.3
11.4
13.5
34.8
28.5
24.2
20.7
17.1
14.2
23.4
24.2
7.6
9.4
11.2
16.1
13.1
10.9
12.1
10.1
8.6
12.7
14.0
25.4
42.6
56.0 112.9 67.4
51.3
41.4
33.0
27.4
4.4
7.2
36.2
30.7
26.4
24.6
20.9
17.8
33.4
35.0
FY16E
32.8
43.9
101.5
33.7
23.7
30.7
55.6
43.0
24.3
54.9
23.9
14.8
8.9
36.2
Source: Company, MOSL
Though 20% down from peak, earnings multiple still rich
P/E relative to Sensex corrected sharply
Source: Bloomberg
Source: Bloomberg
16 April 2014
9

Nestle India
RM inflation a key risk
Commodity cost index has been relatively benign for NEST, with just 3% increase
in CY13.
The company’s gross margin stayed flat in CY13 at 22.1%, benefiting from
channel and portfolio rationalization and pricing actions.
Given the soft consumption environment, we believe it will be difficult to pass
on material price hikes. Thus, it may be difficult to repeat the performance of
2012, when NEST expanded gross margin by 160bp, despite the commodity
index rising by 12.5%.
Relatively benign commodity index in CY13 (%)
Commodity Index
7.8
126
135
RM costs stayed flat in CY13 (%)
RMC
9.9
8.8
8.8
8.5
Packing Material Consumption
7.9
8.2
7.5
7.7
7.9
7.6
140
40.0 40.6 40.3 41.1 40.0 37.8 37.7
34.9 37.6 36.2 38.5
100
2008
Source: Company, MOSL
102
2009
112
2010
2011
2012
2013
Source: Company, MOSL
Key excerpts from management commentary
Company started the year 2013 with caution since it expected the volatility to
continue through the year as well. In retrospect, this proved to be knowledge
prudent. The environment continued to remain challenging during the year.
Our Comments:
While the year was tough, NEST's peers have done relatively
better.
Your company believes that this is a temporary phase, though it is possible that
acceleration in growth may take longer than anticipated earlier.
Our Comments:
Weak macro environment and lower growth in disposable
income may prove to be major challenges for revival in processed food
consumption. Any improvement in macros and consumer sentiment can aid
recovery for NEST.
The ‘Chocolate and Confectionery’ business continues to grow steadily and
maintained leadership in the Chocolatey wafer segment for lighter eating.
Our Comments:
NEST underperformed category growth in our view. It was
outspent by competition, as it could not maintain its share of voice.
16 April 2014
10

Nestle India
Financials and valuations
16 April 2014
11

Nestle India
Financials and valuations
16 April 2014
12

Nestle India
NOTES
16 April 2014
13

Disclosures
Nestle India
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NESTLE INDIA LTD
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Yes
No
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Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United
States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under
applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services
described herein are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major
institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only
available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the
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report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-
dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a
research analyst account.
For U.S.
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial
Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed
in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Anosh Koppikar
Kadambari Balachandran
Email:anosh.Koppikar@motilaloswal.com
Email : kadambari.balachandran@motilaloswal.com
Contact(+65)68189232
Contact: (+65) 68189233 / 65249115
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
For Singapore
Motilal Oswal Securities Ltd
16 April 2014
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
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