Nestle India share price: Jefferies revises price target to Rs 18100

Nestle India continues to focus on growth as there is opportunity to expand the portfolio with >40 new launches in the pipeline. Nestle India is under-indexed in rural areas which offers growth headroom through distribution & SKU expansion. Ongoing capex signals the opportunity. Input price inflation is visible but Nestle India enjoys pricing power, in Jefferies view. Quality & product safety are non-negotiable and that partially explains the restricted supplies during the peak of pandemic. Nestle India share price today is Rs 16170, up Rs 70 or 0.4%.

Nestle India’s Volume growth came in at 5.7% with 8.5% domestic revenue growth in 2020 led by:

1). 8.9% growth in Milk products & Nutrition
2) Prepared dishes grew 11.4% with a strong 19%/20% growth
3) 7% growth in confectionery with KitKat brand up 20% YoY in second half of FY21
4) Beverages was impacted by decline in out-of-home, even as the retail portfolio grew a healthy 11%

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With 25% contribution currently, Nestle India is under indexed in rural India compared to its peers. The demand for its products has risen in rural areas in the last few years, as growing internet penetration aids in creating awareness. Interestingly, bulk packs also enjoy acceptance. Currently, only 35-40% of Nestle's SKUs are sold in rural markets and the company intends to improve penetration of these SKUs and seed new products as well.

Nestle India has a fairly strong distribution reach in urban (7,900+ towns). However, rural reach has expanded from 1,000 villages in CY16 to 90,000 villages by CY19, though appointment of small distributors & wholesale hubs. The target is to reach at least 120000 villages by CY24. Overall outlet reach has increased from 4 mn in CY16 to 4.7 mn in CY19.

Nestle India’s Revenue share from new products has increased from 1.5% in CY16 to 4.3% in CY20, led by 80 new launches, of which 70% have been successful. Innovation took a back-seat in CY20 due to the pandemic, as the focus was on the core but this is slated to change in 2021 as >40 innovations are in the pipeline.

Nestle India’s Several brands such as Maggi, Kit Kat, Milkybar are now plastic neutral and the target is to shift completely to reusable, recyclable or compostable plastics by 2025. Water usage per ton of production has reduced by half in the last five years.

Nestle India remains a quality franchise in the packaged foods category in India. However, the current valuation (57x CY22 EPS) leaves little room for disappointment. Jefferies remain on the sidelines and maintain a Hold rating with a revised price target of Rs 18100 on slightly lower multiples.