The double-digit growth in itself is eye-popping, given the FMCG sector has seen low single-digit volume growth in recent times. Vishal Chhabria reports.
Photograph: Reuters
When Nestlé India says it is eyeing double-digit growth, it is bound to draw attention of people from across the spectrum.
The double-digit growth -- with strong focus on volumes and market share gains -- in itself is eye-popping, given the fast moving consumer goods (FMCG) sector has seen low single-digit volume growth in recent times.
Also, not so long ago, Nestlé's own track record was seen as wanting. In fact, data by analysts suggest Nestlé clocked weak volumes for the better part of the past six years, and the growth in revenue (again not exciting enough) was driven by price increases.
Not surprisingly then, the Nestlé India stock was up 6.6 per cent at ₹7,030 last week. And if the company can achieve the stated goals -- distribution network expansion, focus on innovation and product premiumisation, as well as new launches -- there could be more room for upside, even as valuations are not cheap.
The change is also seen as a reversal in Nestlé's earlier strategy of focusing on profit margins.
Markets, over the longer run, typically reward volume-led growth with decent margins.
IIFL's analysts say increased focus on sampling, ramp-up of distribution penetration, and slow pace of price increases make them believe Nestlé's focus on volume growth is not just lip service.
Nestlé's financial performance in CY17, so far, gives confidence. Analysts from Elara Capital say Nestlé reported real internal growth of 8.1 per cent year-on-year (y-o-y) and organic growth of 8.9 per cent y-o-y (reported growth of 8.2 per cent) in the first half of CY17, led by 9.3 per cent in domestic business (volume growth of 9.5 per cent/10.5 per cent adjusted for GST-led de-stocking).
The company has launched 43 new offerings since January 2016, of which a third were in the value-up category (premiumisation), say Edelweiss Securities' analysts led by Abneesh Roy. "Key global categories for Nestlé like water, coffee machine and pet care are being evaluated for launch in India," Roy adds.
If Nestlé can indeed clock healthy double-digit profitable growth, the stock could re-rate.
But, the journey may not be smooth given the weak business environment and elevated competition.
Also, there could be some hiccups on the profitability front as input costs have risen in recent months, while Nestlé has delayed some of the GST-related price hikes.
IIFL analysts, though, put it well: "A likely sustained double-digit sales growth is worth the margin sacrifice. Moreover, gradual changes in the DNA of Nestlé India makes it a good long-term investment opportunity."
Target prices of analysts, however, indicate limited near-term upside. A correction could be a good entry point in the stock.
