Result Update

May 15, 2017

Rating matrix
Rating : Buy Nestlé India (NESIND) | 6600
Target : | 7420
Target Period : 12-15 months
Potential Upside : 12% Volume traction to drive growth…
What’s changed? • Nestlé India (NIL) reported a healthy set of numbers with revenue in-
Target Unchanged
line with estimates. The company has adopted Ind-As from January
EPS CY17E Changed from | 132.8 to | 133.4
1, 2017. Hence, our estimates are not comparable for line items.
EPS CY18E Unchnaged
Rating Unchanged
Sales for the quarter was up 9.1% YoY to | 2575.7 crore (I-direct
estimate: | 2566.2 crore) led by 9.7% domestic sales growth. The
Quarterly performance company reported volume growth across categories and has
Q1CY17 Q1CY16 YoY (%) Q4CY16 QoQ (%) benefited from the price hike taken in previous quarters
Sales 2575.7 2360.8 9.1 2334.8 10.3 • Raw material cost as a percentage of net sales has increased 315 bps
EBITDA 525.1 547.8 -4.1 491.3 6.9 YoY on account of a rise in input cost, especially milk. Additionally,
EBITDA % 20.3 23.1 -288 bps 20.8 -56 bps other expense as a percentage of net sales has increased 174 bps
PAT 306.8 287.3 6.8 195.4 57.0
YoY on account of high energy cost and increased advertisement
Key financials expense towards brand building exercises. Thus, it reported 288 bps
| Crore CY15 CY16 CY17E CY18E YoY contraction in the operating margin to 20.3% (estimate: 19.0%)
Net Sales 8,123.3 9,409.6 10,737.1 12,095.4 • NIL enjoyed lower tax for the quarter on account of higher tax
EBITDA 1,633.9 2,019.7 2,213.7 2,531.5 holiday benefits. Thus, reported profit for the quarter came in at
Net Profit 563.3 1,001.4 1,286.1 1,489.8 | 306.8 crore, up 6.8% against our estimate of | 287.5 crore
EPS (|) 58.4 103.9 133.4 154.5
Prepared dishes – regaining their strong position in sales
Valuation summary The prepared dishes segment, which accounted for ~30% of NIL's sales
CY15 CY16 CY17E CY18E prior to the noodles ban was dominated by Maggi noodles (we believe
P/E 113.0 63.6 49.5 42.7 ~75% of the segment’s revenue was contributed by Maggi). Hence, post
Target P/E 127.0 71.4 55.6 48.0 that, revenue from prepared dishes dipped to | 1314.1 crore in CY15,
Div. Yield 0.7 1.0 1.5 1.7 contributing 15.6% to the sales. However, in order to re-build the core
Mcap/Sales 7.8 6.8 5.9 5.3
and get back its position, brand Maggi unleashed a slew of innovations in
EV/EBITDA 38.7 31.1 28.3 24.9
noodles and other related categories in CY16 and successfully gained
RoNW (%) 32.3 36.2 40.0 44.1
RoCE (%) 29.7 34.9 36.7 44.3
60% market share (pre-ban it was ~75%). The segment, thus, contributed
* CY16 onwards numbers are as per IND-AS 24.2% to gross sales clocking revenue growth of 74.9% to | 2298.9 crore
in CY16. Growth was led by 73.0% volume growth and 1.1% realisation
Stock data growth. We believe that with strong comeback of Maggi and various
Particular Amount variant launches under the brand, revenues from prepared dishes will
Market Capitalization (| Crore) 63830 grow at a CAGR of 18.0% in CY16-18E to | 3202.3 crore with volumes
Total Debt (CY16) (| Crore) 33.2
nearing Maggi pre-ban levels.
Cash & Investments (CY16) (| Crore) 2,155.0
EV (| Crore) 61,708.2 Volume traction to drive growth amid high competition across categories
52 week H/L 7390 / 5490 NIL is the market leader in instant noodles and baby food products in
Equity capital | 96.4 crore India and No. 2 player in the instant coffee and chocolates segment. The
Face value | 10 company enjoys high brand equity in its leading segments and has grown
Price performance on the back of price hikes in past four years. Amid intense competition
1M 3M 6M 12M across segments, the company has hardly clocked any volume growth
Nestle India 1.5 7.0 10.6 16.0 over the same period. Post the Maggi fiasco, the situation worsened.
HUL 6.5 14.0 22.2 15.3 However, understanding the need of the hour, NIL launched more than 30
ITC -1.7 2.4 16.5 30.3 products in CY16 across its segments, including new launches as well as
GSK Consumer 2.1 3.9 5.8 -12.2 variants. We, thus, remain upbeat on the company’s prospect given the
aggression in product launches and marketing initiatives. NIL is also keen
Research Analyst
on bringing few global brands to India, which may provide further thrust.
We are factoring in 10.9% and 9.2% volume growth for CY17E & CY18E,
Sanjay Manyal
sanjay.manyal@icicisecurities.com
respectively, remaining marginal improvement on realisation front.
Reiterate BUY recommendation; new launches to provide boost
Tejashwini Kumari We are estimating 13.3% CAGR in the revenue over CY16-18E factoring in
tejashwini.kumari@icicisecurities.com CAGR of 10.1% for blended volumes. Given the competitive environment
across categories, we are factoring in 2.0% and 3.1% realisation growth
for the same period. PAT is estimated to grow at a CAGR of 22.0% over
CY16-18E. We remain positive on the growth outlook and reiterate our
Buy recommendation on the stock with target price of | 7420/share.

ICICI Securities Ltd | Retail Equity Research

Variance analysis
Q1CY17 Q1CY17E Q1CY16 YoY (%) Q4CY16 QoQ (%)
Net Sales 2,575.7 2,566.2 2,360.8 9.1 2,334.8 10.3 Growth largely volume based across categories; domestic
sales clock 9.7% YoY growth
Operating Income 16.2 14.9 6.7 140.7 25.3 -36.0

Raw Material Expenses 1,093.9 1,099.6 987.2 10.8 960.1 13.9 Raw material cost increased 315 bps YoY on account of rise in
input cost, especially milk
Employee Expenses 246.1 297.2 212.6 15.8 228.2 7.9
Other operating Expenses 626.8 693.4 536.2 16.9 586.7 6.8 Elevated overhead expenditure on account of higher
advertisement expense and fuel cost

EBITDA 525.1 490.9 547.8 -4.1 491.3 6.9 Led by higher espenses, EBITDA declined 4.1% YoY
EBITDA Margin (%) 20.3 19.0 23.1 -288 bps 20.8 -56 bps
Depreciation 86.7 91.8 89.1 -2.8 90.3 -4.0
Interest 22.8 1.1 25.9 -12.2 21.0 8.2 On account of Ind-AS adoption, there is a difference in interest
cost reporting
Other Income 41.6 31.2 35.3 17.7 41.5 0.2

PBT 449.5 429.1 453.1 -0.8 323.0 39.2

Exceptional Items 7.8 0.0 15.0 -48.2 98.5 -92.1
Tax Outgo 142.8 141.6 165.8 -13.9 127.6 11.9 Lower tax rate for the quarter on account of higher tax holiday
benefits
PAT 306.8 287.5 287.3 6.8 195.4 57.0 Reported PAT grew 6.8% YoY led higher other income and
lower tax outgo
Adj. PAT 306.8 287.5 296.4 3.5 243.8 25.8
Source: Company, ICICIdirect.com Research

Change in estimates
CY17E CY18E
(| Crore) Old New % Change Old New % Change Comments
Sales 10470.8 10737.1 2.5 11701.4 12095.4 3.4 Revised revenue numbers marginally upwards on account of reported volume
growth and aggressive product launches
EBITDA 2,077.8 2,213.7 6.5 2,374.5 2,531.5 6.6
EBITDA Margin(%) 19.7 20.5 77 bps 20.2 20.8 64 bps
PAT 1280.1 1286.1 0.5 1489.9 1489.8 0.0
EPS (|) 132.8 133.4 0.5 154.5 154.5 0.0
Source: Company, ICICIdirect.com Research

Assumptions
Current Earlier
CY14 CY15 CY16 CY17E CY18E CY17E CY18E
Gross Sales (| crore)
Milk Product and Nutrition 4,575.2 4,669.4 4,713.7 5,345.3 6,005.4 5,351.5 6,012.4
Beverages 1,339.8 1,336.0 1,294.9 1,400.5 1,529.3 1,547.8 1,690.2
Prepared dishes 2,961.3 1,314.1 2,298.9 2,723.0 3,202.3 2,617.8 2,994.8
Chocolate & confectionery 1,253.2 1,110.9 1,184.3 1,268.3 1,358.4 1,333.4 1,428.3
Volume Growth (%)
Overall Volume Growth -0.6 -36.3 26.2 10.9 9.2 12.6 8.1 Volumes tweaked based on CY16 reported numbers
Milk Product and Nutrition -2.3 -2.7 -1.5 8.0 7.0 7.0 7.0
Beverages -11.0 -10.3 1.3 5.0 5.0 5.0 5.0
Prepared dishes 3.7 -59.5 73.0 15.0 12.0 20.0 10.0
Chocolate & confectionery -12.1 -19.5 7.7 5.0 5.0 5.0 4.0

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2

 Company Analysis
Volume traction to drive growth amid high competition across categories
NIL is the market leader in instant noodles and baby food products in
India and No. 2 player in the instant coffee and chocolates segment. The
company enjoys high brand equity in its leading segments and has grown
on the back of price hikes in the past four years. Amid intense
competition across segments, the company has hardly clocked any
volume growth over the same period. Post the Maggi fiasco, the situation
worsened. However, understanding the need of the hour, NIL launched
more than 30 products in CY16 across segments, which included new
launches as well as variants. Further, it plans to enter five new categories
viz. Nespresso (a coffee machine), Dolce Gusto (coffee capsule system),
petcare, healthcare & skincare. We believe its aggressive step towards a
slew of new launches supported by higher advertisement expense for
proper communication would set a strong platform for the company’s
growth with a balanced portfolio.
Thus, we remain upbeat on the company’s prospect and factoring in
10.9% and 9.2% volume growth for CY17e and CY18E, respectively,
remaining muted on the realisation front due to intense competition at
2.0% and 3.1% over the same period. Thus, we expect revenue to grow
at 13.3% CAGR over CY16-18E.

Exhibit 1: Revenues to grow at CAGR of 13.3% over CY16-18E

21.9
13000 19.8 25
15.8 20
11000 14.1 12.7
10.8 15
9.1 9.1
9000
10
7000 5
5000 0
-5
3000
-10
1000 -17.2
-15
-1000 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E -20

Net Sales (| crore) - LHS Net Sales Growth (%) - RHS

Source: Company, ICICIdirect.com Research

Exhibit 2: Volume to gain traction with new launches and aggressive communication

40
30
20 4.2
12.1 30.1 26.2 2.9
10 17.0 3.1
6.8 9.9 7.1 8.9 10.9 9.2
0 0.8 1.9 -0.6
-8.2
-10
-20 -36.3
-30
-40
CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E

Volume Growth (%) Price Growth (%)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 3

 Milk products & nutrition – focus on nutrition and value addition
The Milk products & nutrition segment is the largest contributor to NIL’s
revenues at 49.7% of gross revenues for CY16. Segment sales grew
marginally by 0.9% for the year at | 4713.7 crore. The category volumes
continued to decline for a fifth year in a row. It posted a decline of 1.5%
for CY15. However, the company is now focussing on the value-added
segment in the dairy segment. It launched premium yoghurt under the
brand name of Nestlé a+ Grekyo in several variants as a brand extension
of Nestlé a+ range. It also launched Everyday Masala Fusion Dairy
Whitener with six natural spice flavours, Nescafé ready-to-drink (RTDs) in
three flavours. It also extended the nutrition products from infants to
toddlers by introducing Ceregrow for children between the age group of
two and five years. Additionally, it renovated the entire Cerelac range by
fortifying it with iron to enhance the nutritional aspects. Additionally, it
launched the protein rich milk Nestlé a+ Pro-Grow.
Going ahead, we expect the overall category growth to be a mix of
volume CAGR of 7.5% and realisation CAGR of 5.0% supported by the
new launches for CY17E & CY18E. We estimate revenues from milk
products & nutrition will grow at 12.9% CAGR over CY16-18E.

Exhibit 3: Revenue to grow at 12.9% CAGR over CY16-18E Exhibit 4: Revenue growth to be mix of volume & realisation growth
25
7000 20.7 25
20
6000
15.2 20 15
5000 13.4
12.4 12.4 15 10 17.8 21.4 5.0
4000 5.0
15.0
3000 10 5 8.0
5.5 6.7 4.9 7.0
2000 0 2.5 -5.1 2.5
5 -1.1
1000 2.1 0.9
-5 -2.3 -2.7 -1.5
0 0
-10
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E
Revenues (| crore) - LHS Revenue Growth (%) - RHS Volume growth (%) Realisation growth(%)

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Beverages – Focus on differentiated products to aid segment growth

The beverages segment faced intense competition and, hence, posted
3.1% revenue decline. Though the segment volume increased 1.3%,
realisation declined 4.3%. We believe the average realisation drop was on
account of high promotional offers. As per industry data, Nescafe’s
market share has declined from 60.1% in CY13 to 55.5% in CY15. This is
largely on account of intense competition from Bru (HUL’s brand). The
company is now focussing on launching differentiated products as a part
of the growth strategy and has come up with products like Nescafé
Sunrise Insta-Filter. It also launched variants for Nestea Iced Tea and
Nescafé Latté. Further, the company is planning to bring global brands
like Nespresso (a coffee machine) and Dolce Gusto (coffee capsule
system) in Indian market, which will further be a booster for the segment.

We expect the beverages segment to see volume growth of 5.0% (CAGR

CY16-18E) & price CAGR of 3.5% over the same period. The segment
revenue, thus, is expected to grow at a CAGR of 8.7% over CY16-18E.

ICICI Securities Ltd | Retail Equity Research Page 4

Exhibit 5: Beverages revenue growth expected at 8.7% CAGR Exhibit 6: Volume growth expected to be in focus in near term
18.8 17.9 25
1800 20
20
1500 15
9.2 15
1200 8.1 7.9
10 10 17.8
5.1 13.7 4.0
900 5 10.6 11.2 3.0
5 9.3
1.2 5.0 5.0
600 -0.3 0 0.9 -5.0 1.3
-3.1 0 -4.3
300 -5 -11.0 -10.3
0 -5 -10
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E -15
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E
Revenues (| crore) - LHS Revenue Growth (%) - RHS Volume growth (%) Realisation growth(%)

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Prepared dishes – Rebuilding, reinvigorating portfolio

Prepared dishes & cooking aid segment which includes revenue from
instant noodles, pasta, cooking aids, soups and sauces, reached ~70% of
its pre-Maggi fiasco level in volume terms. The segment witnessed
revenue growth of 74.9% to | 2298.9 crore led by 73.0% volume growth
and 1.1% realisation growth. It contributed 24.2% to the total gross
revenue against 15.6% in CY16 (29.2% in CY14).
In order to re-build the core back and get back its position, brand Maggi
unleashed a slew of innovations in noodles and other related categories
in CY16. It launched Maggi Hot Heads, Maggi No Onion No Garlic Masala,
Hot heads cuppa noodles and re-launched Maggi Cuppa Masala and
Maggi Cuppa Chilly Chow. It also forayed into the soup market with New
Maggi Cup-a-licious soups in six different flavours. Further, it expanded
its sauces range by launching the Maggi Masala Sauce.
Additionally, apart from the thematic advertising, brand Maggi also put
immense focus behind small town and rural areas via sampling and
vernacular media engagements. Through all these launches, innovations
and advertisements, Maggi strengthened its market share of 60% (pre-
ban 75%) and came back to No.25 position in the Brand Equity’s Most
Trusted Brand Survey for 2016 (had slipped to 95th rank in 2015).
Hence, along with maintaining its strength of premium product offerings
to consumers, we expect revenues from prepared dishes to grow at a
CAGR of 18.0% in CY16-18E to | 3202.3 crore with volumes nearing
Maggi pre-ban levels.

Exhibit 7: Prepared dishes revenues to grow to pre Maggi fiasco level Exhibit 8: Recall impacts prepared dishes segment in CY15

3600 74.9 100 100 1.1

80 80
3000
29.2 24.9 60 60 73.0
2400 12.8 11.0 18.5 40 40
9.7 10.3 4.4 3.0 5.0
20 20 7.0 5.8 9.5
1800
0 0 15.0
13.2 8.0 12.0
1200 -20 -20 3.8 3.7
-55.6
-40 -40 -59.5
600
-60 -60
0 -80 -80
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E

Revenues (| crore) - LHS Revenue Growth (%) - RHS Volumes growth (%) Realisation growth(%)

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 5

 Chocolate and confectionery – Focus on premium products
NIL’s chocolate & confectionery segment (12.5% of gross revenues CY16)
includes strong brands as KitKat, Munch, Milky Bar, Bar One and Polo.
Post the volume decline for the past five years in a row, the chocolate and
confectionery segment registered volume growth of 7.7% leading to
revenue growth of 6.6%. Realisation declined 1.0% during the year. The
segment focused on the key brands and high growth premium segments.
It launched KitKat Duo and Nestlé Munch Trio and re-launched the
flagship premium brand Alpino.
With increasing marketing initiatives and new launches, we believe
volume growth should gain traction over time. We estimate the volume
for the segment will grow at 5.0% CAGR in CY16-18E. Hence, the revenue
from the segment is expected to grow at 7.1% CAGR in the same period.
Exhibit 9: Sales to gain traction, going forward Exhibit 10: Revival in volume growth to support category
12.7 20
1800 10.0 15
7.1 7.1 15
6.4 6.6 10 10 17.3
1200 5 14.4 12.4 10.8 2.0 2.0
5 10.1 7.7 5.0 5.0
0 0 -1.5 -2.2 -1.0
-2.6 -5 -9.4 -12.1
600 -5
-11.4 -10
-10 -19.5
-15
0 -15 -20
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E -25
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E
Revenues (| crore) - LHS Revenue Growth (%) - RHS Volumes growth (%) Realisation growth(%)

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 6

 Operating margin to remain capped in near term
NIL’s margins remained healthy at ~20% until CY10 with strong volume
growth of ~16% and moderate price hikes of ~4%. However, during
CY11-14, higher price hikes at ~10% pushed margins to ~22%. Further,
the Maggi noodles recall led to lower net sales for the company,
impacting margins adversely. Going ahead, though we expect traction in
volumes, the company’s ability to take significant price hike is expected to
remain capped amid intense competition. Thus, we are factoring in
operating margin of 20.5% and 20.8% for CY17E and CY18E, respectively
considering higher raw material cost and marginal realisation growth.
Exhibit 11: EBITDA margin (%) trend

23 22.3
21.7
21.3
21.0 21.0 20.8
20.5
21 20.0

19
(%)

17

15
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E

Source: Company, ICICIdirect.com Research

Profit to grow strongly at CAGR of 18.1% over CY16-18E

PAT growth remained healthy at 23.5% CAGR in CY07-11 following
healthy revenue growth and sustained higher margins. However, PAT
growth moderated thereafter, until CY13, following the slowdown in
revenue growth and increase in interest cost & depreciation impacting
earnings. The increase in interest and depreciation during the period was
following the aggressive capex of ~| 3000 crore to double its existing
capacity. The company repaid its debt completely in July 2014. However,
NIL realised cumulative exceptional loss of | 500.8 crore in CY15 arising
out of costs incurred by the company due to the nationwide recall of
Maggi noodles. This adversely affected the earnings at | 563.3 crore in
CY15 against | 1184.7 crore in CY14. Post re-launch of Maggi, the
company reported | 1001.4 crore profit for CY16. We expect it to clock
profit CAGR of 22.0% in CY16-18E to | 1489.8 crore.
Exhibit 12: PAT growth trend

1600 77.8 100

1400 80
1200 60
25.0 28.4
1000 17.5 15.8 40
11.1 6.0
800 20
4.6
600 0
400 -20
-52.5
200 -40
818.7 961.5 1067.9 1117.1 1184.7 563.3 1001.4 1286.1 1489.8
0 -60
CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E

Net Profit (| crore) PAT Growth (%)

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 7

 Outlook & valuation
With a population of ~120 crore, India is one of the largest consumer
markets in the world. The categories in which NIL operates have
comparatively lower penetration in India (instant noodles, packaged milk,
chocolates) when compared to the economies of other countries. Further,
with penetration even in urban India being low, rural India has further
lower penetration, thereby providing huge scope of growth for the
company.

Maggi made a strong comeback in the market (with market share of 60%
by the end of CY16). There were aggressive launches of more than 30
products across segments in CY16 with focus on balanced portfolio
supported by strong communication to gain traction in volume across
segments. In conjunction with this, since Nestlé maintained its strength of
premium product offerings to consumers, we believe NIL would be able
to clock higher volume growth along with concomitant growth on
earnings front.

We remain positive on the company’s future prospects given its thrust on

a) creating a balanced portfolio through new launches and planned entry
in new categories, b) aggressive communication strategies and c)
expanding the reach. Rapid urbanisation and increasing participation of
women in decision making is a huge opportunity for the company given
the nature of its product portfolio. The company is gearing up to tap the
same with the new launches with the proposition of convenience,
nutrition and on-the-go usage. Thus, we believe the stock would continue
to trade at a premium multiple as it has commanded in the past. We have
modelled net sales CAGR of 13.3% in CY16-18E and earnings CAGR of
22.0% for NIL during the same period. We remain positive on the growth
outlook and reiterate our BUY recommendation on the stock with a target
price of | 7420/share valuing it at an earning multiple of 48x for CY18E.

Exhibit 13: Valuations

Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE
(| cr) (%) (|) (%) (x) (x) (%) (%)
CY16 9409.6 15.8 103.9 77.8 63.7 31.2 36.2 34.9
CY17E 10737.1 14.1 133.4 28.4 49.6 28.4 40.0 36.7
CY18E 12095.4 12.7 154.5 15.8 42.8 25.0 44.1 44.3
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 8

 Annual Report highlights
• The company’s focus in CY16 was on restoring stability in operations
ensuring double-digit growth. It also prioritised digital engagement
and enhanced media responsiveness
• Domestic sales for the company grew 13.5%. Exports clocked 3.5%
growth
• It successfully launched more than 30 products across categories
including new launches as well as variants. The aggressive product
launches led to volume growth in beverages, prepared dishes and
chocolate & confectionery segments
• Maggi made a strong comeback during the year and ended the year
with a market share of 60%. The company launched variants of Maggi
along with brand extension with soups and cuppa noodles (re-
launched). With market share gain and strong marketing
communications, Maggi gained back its credibility and stood at 39th in
Top 50 most valuable brands
• The milk products category continued to post volume decline amid
stiff competition and spillover impact of Maggi fiasco. Though the
company has launched value added and premium products, which
include Greek yoghurt, protein rich drinks, ready to drink products
and toddler food, volume continued to slide and declined 1.5%
• The beverage segment, which was witnessing a volume decline for
the past two years, posted marginal volume growth of 1.3% with new
product launches. Amid intense competition and promotional offers,
its sales declined 3.1%, it was the only category to report revenue
decline during the year. The instant tea remained flat for the year and
instant coffee registered growth on account of increase in exports to
Romania and Bangladesh
• Chocolate & confectionery segment was witnessing volume decline in
the past five years on account of intense competition. However, owing
to new launches and competitive pricing coupled with promotions, it
clocked volume growth of 7.7%
• Infant nutrition exports also showed good growth. The company
launched a product named Ceregrow for children in the age group of
2-5 and also renovated the entire Cerelac range by fortifying it with
Iron to enhance the nutritional aspects.
• The company started exports of its confectionery products to eight
markets in the Middle East and Ghana
• During the year, the company supplemented the provision for
contingencies with further amount of | 168.5 crore (net) for
contingencies resulting mainly from issues under litigation/dispute and
other uncertainties
• Total dividend paid during the year was | 63.0/share, amounting to
| 607.4 crore
• Nestlé’s R&D centre India in Manesar has also brought Nestlé global
research & development closer to Indian operations and is helping it to
come up with more innovating products. For instance, the company
launched more than 30 products during the year, which included new
launches as well as variants and re-launches
• In light of its commitment to nutrition, health and wellness, the
company has put QR codes on all products, which provides
consumers information specific to product under three heads –
nutrition, environment and society
• The company is exploring ways to bring new products to the Indian
market from the kitty of ~2000 brands globally. Nestlé India’s focus
remains on innovation and nutrition. It is further planning to enter five
new categories viz. Nespresso (a coffee machine), Dolce Gusto (coffee
capsule system), petcare, healthcare & skincare

ICICI Securities Ltd | Retail Equity Research Page 9

Exhibit 14: Segmental growth over the years
CY11 CY12 CY13 CY14 CY15 CY16 CY17E CY18E
Sales growth (%)
Milk Products 20.7 15.2 5.5 12.4 2.1 0.9 13.4 12.4
Beverages 18.8 5.1 17.9 1.2 -0.3 -3.1 8.1 9.2
Prepared dishes 24.9 12.8 11.0 9.7 -55.6 74.9 18.5 17.6
Chocolate & Cofectionery 12.7 6.4 10.0 -2.6 -11.4 6.6 7.1 7.1
Volume growth (%)
Milk Products 2.5 -5.1 -1.1 -2.3 -2.7 -1.5 8.0 7.0
Beverages 0.9 -5.0 9.3 -11.0 -10.3 1.3 5.0 5.0
Prepared dishes 13.2 8.0 3.8 3.7 -59.5 73.0 15.0 12.0
Chocolate & Cofectionery -1.5 -9.4 -2.2 -12.1 -19.5 7.7 5.0 5.0
Realisation growth (%)
Milk Products 17.8 21.4 6.7 15.0 4.9 2.5 5.0 5.0
Beverages 17.8 10.6 7.9 13.7 11.2 -4.3 3.0 4.0
Prepared dishes 10.3 4.4 7.0 5.8 9.5 1.1 3.0 5.0
Chocolate & Cofectionery 14.4 17.3 12.4 10.8 10.1 -1.0 2.0 2.0
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10

Recommendation history vs. Consensus
8,000 60.0

50.0
7,000
40.0
(|)

6,000 30.0

(%)
20.0
5,000
10.0

4,000 0.0
May-15 Jul-15 Sep-15 Dec-15 Feb-16 May-16 Jul-16 Oct-16 Dec-16 Feb-17 May-17

Price Idirect target Consensus Target Mean % Consensus with SELL

Source: Bloomberg, Company, ICICIdirect.com Research

Key events
Date Event
CY10 ITC and GSK Consumer enter instant noodles segment intensifying competition in the near monopoly segment for Nestlè
Jul-11 Decline in coffee prices (~11% since April, 2011); revenue growth & margins back to 20%+; FMCG Index return - ~33% in Q2CY11
Jan-12 Volume growth in CY11 dips to 7% vs. 17% in CY10; increasing prices due to higher input cost impacts volume growth; ITC gets aggressive in noodles segment with
HUL re-launching Knorr in the segment
H1CY12 Declining volume growth keeps revenue growth below 15%; higher margins (+21%) continue to drive profitability (+15% YoY); stock supported by rising FMCG
index (~26% return YoY) as a safe haven during underperforming markets
CY12 Stock return ~13% due to less than 1% volume growth in CY12, thereby not justifying high valuations; FMCG Index return CY12 - ~30%
Apr-13 Intensifying competition and incessant price increases across categories drags revenue growth to ~9% with volume growth at 2-3%
Jul-13 Decline of ~25% in coffee prices YoY; revival in revenue growth to ~12% supported by price cuts in milk products and new launches in noodles segment; FMCG
continues to remain the preferred sector among investors (FMCG Index return ~35% YoY in Q2CY13)
Nov-13 Rumours of buyback by the parent drive stock price; revenue growth remains muted
Jan-15 Softening commodity prices aiding the company's operating margins
Apr-15 UP FSDA orders recall of 2,00,000 packets of Maggi noodles citing higher lead content beyond permissible limit thereby declaring it unsafe
Jun-15 FSSAI bans sale of Maggi noodles in India
Oct-15 NIL declares that Maggi noodles are safe for consumption citing test results from 3 labs mandated by Bombay High Court
Nov-15 NIL commences rollout of Maggi instant noodles through online and offline channels
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern
Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17
1 Nestle SA 31-Dec-16 34.28 33.1 0.0 Promoter 62.8 62.8 62.8 62.8 62.8
2 Maggi Enterprises, Ltd. 31-Dec-16 28.48 27.5 0.0 FII 15.0 14.9 14.8 13.9 13.2
3 Life Insurance Corporation of India 31-Dec-16 3.48 3.4 0.4 DII 5.7 6.0 5.9 6.7 7.4
4 ARISAIG Partners (Asia) Pte. Ltd. 31-Dec-15 1.90 1.8 0.0 Others 16.5 16.4 16.5 16.7 16.6
5 Aberdeen Asset Management (Asia) Ltd. 28-Feb-17 1.52 1.5 0.0
6 Stewart Investors 31-Mar-17 1.10 1.1 0.6
7 SBI Funds Management Pvt. Ltd. 31-Mar-17 0.95 0.9 0.0
8 First State Investments (Singapore) 30-Nov-16 0.84 0.8 -0.3
9 The Vanguard Group, Inc. 31-Mar-17 0.75 0.7 0.0
10 BlackRock Institutional Trust Company, N.A. 30-Apr-17 0.65 0.6 0.0
Source: Reuters, ICICIdirect.com Research
Recent Activity
Buys Sells
Investor name Value Shares Investor name Value Shares
Stewart Investors 60.14m 0.58m First State Investments (Singapore) -24.73m -0.27m
Life Insurance Corporation of India 32.61m 0.37m RBC Investment Management (Asia) Ltd. -9.3m -0.1m
BlackRock Institutional Trust Company, N.A. 1.93m 0.02m Lyxor Asset Management -9.07m -0.09m
Lombard Odier Darier Hentsch & Cie 0.95m 0.01m UTI Asset Management Co. Ltd. -2.7m -0.03m
Northern Trust Global Investments 0.85m 0.01m Invesco PowerShares Capital Management LLC -1.35m -0.01m
Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11

Financial summary
Profit and loss statement | Crore Cash flow statement | Crore
(Year-end December) CY15 CY16 CY17E CY18E (Year-end December) CY15 CY16 CY17E CY18E
Total operating Income 8175.3 9474.6 10805.3 12167.0 Profit after Tax 563.3 1,001.4 1,286.1 1,489.8
Growth (%) -17.0 15.9 14.0 12.6 Add: Depreciation 375.5 365.5 343.5 364.3
Raw Material Expenses 2,920.6 3,882.8 4,471.4 5,003.0 (Inc)/dec in Current Assets -467.6 -413.5 222.2 -374.8
Employee Expenses 912.8 901.6 1,038.6 1,185.3 Inc/(dec) in CL 125.7 151.5 -279.5 104.9
Marketing Expenses 934.0 0.0 0.0 0.0 CF from operating activities 596.9 1,104.9 1,572.2 1,584.2
Administrative Expenses 922.7 41.8 42.9 48.4 (Inc)/dec in LT loans & adv -0.5 -4.6 20.0 20.0
Other expenses 851.4 2,295.5 2,619.9 2,927.1 (Inc)/dec in other investments -37.3 -132.5 0.0 0.0
Total Operating Expenditure 6,541.4 7,121.6 8,172.9 9,163.8 (Inc)/dec in Fixed Assets -82.7 -154.5 -400.0 -400.0
EBITDA 1,633.9 2,019.7 2,213.7 2,531.5 Others 158.7 356.3 60.0 -375.0
Growth (%) -21.2 23.6 9.6 14.4 CF from investing activities 38.2 64.7 -320.0 -755.0
Depreciation 375.5 365.5 343.5 364.3 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0
Interest 3.3 90.9 100.9 112.0 Inc/(dec) in loan funds 1.3 16.4 0.0 -17.7
Other Income 110.1 150.9 127.6 138.5 Dividend paid & dividend tax -563.3 -731.1 -1,157.0 -1,330.6
PBT 1,314.5 1,682.8 1,863.9 2,159.1 Inc/(dec) in Sec. premium 0.0 0.0 0.0 0.0
Others 500.8 137.5 0.0 0.0 Others -19.4 0.4 0.0 0.0
Total Tax 250.4 544.0 577.8 669.3 CF from financing activities -581.3 -714.3 -1,157.0 -1,348.3
PAT 563.3 1,001.4 1,286.1 1,489.8 Net Cash flow 53.8 455.2 95.2 -519.1
Growth (%) -52.5 77.8 28.4 15.8 Opening Cash 445.8 499.6 954.8 1,050.0
EPS (|) 58.4 103.9 133.4 154.5 Closing Cash 499.6 954.8 1,050.0 530.9
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research,
* CY16 onwards numbers are as per IND-AS * CY16 onwards numbers are as per IND-AS

Balance sheet | Crore Key ratios

(Year-end December) CY15 CY16 CY17E CY18E (Year-end December) CY15 CY16 CY17E CY18E
Liabilities Per share data (|)
Equity Capital 96.4 96.4 96.4 96.4 EPS 58.4 103.9 133.4 154.5
Reserve and Surplus 2,721.4 2,917.3 3,121.1 3,280.3 Cash EPS 97.4 141.8 169.0 192.3
Total Shareholders funds 2,817.8 3,013.7 3,217.5 3,376.7 BV 292.2 312.6 333.7 350.2
Total Debt 16.8 33.2 33.2 15.5 DPS 48.5 63.0 100.0 115.0
Deferred Tax Liability 172.9 154.2 114.2 222.7 Cash Per Share 230.2 262.4 298.1 335.9
Long Term Provisions 1,597.2 1,972.2 2,072.2 1,588.7 Operating Ratios (%)
Total Liabilities 4,604.7 5,173.3 5,437.1 5,203.6 EBITDA Margin 20.0 21.3 20.5 20.8
PBT / Net Sales 10.0 16.4 17.4 17.9
Assets PAT Margin 6.9 10.6 12.0 12.3
Gross Block 5,117.4 5,260.0 5,560.0 5,860.0 Inventory days 36.9 36.6 39.0 40.0
Less: Acc Depreciation 2,219.5 2,530.5 2,874.1 3,238.4 Debtor days 3.5 3.8 5.0 7.0
Net Block 2,897.9 2,729.5 2,685.9 2,621.6 Creditor days 33.7 31.0 25.0 23.0
Capital WIP 230.8 188.2 288.2 388.2 Return Ratios (%)
Total Fixed Assets 3,128.6 2,917.6 2,974.1 3,009.8 RoE 32.3 36.2 40.0 44.1
LT Loans & Advances 130.4 135.0 115.0 95.0 RoCE 29.7 34.9 36.7 44.3
Inventory 820.8 943.2 1,147.3 1,325.5 RoIC 32.5 40.3 45.6 50.6
Debtors 78.4 97.9 147.1 232.0 Valuation Ratios (x)
Loans and Advances 88.4 57.0 132.4 149.1 P/E 113.0 63.6 49.5 42.7
Current Investments 997.9 1,300.9 750.1 845.0 EV / EBITDA 38.7 31.1 28.3 24.9
Cash 499.6 880.0 1,050.0 530.9 EV / Net Sales 7.8 6.7 5.8 5.2
Total Current Assets 2,485.0 3,279.0 3,226.8 3,082.5 Market Cap / Sales 7.8 6.8 5.9 5.3
Creditors 749.0 799.2 735.4 762.2 Price to Book Value 22.6 21.1 19.8 18.8
Provisions 265.3 320.7 205.9 232.0 Solvency Ratios
Other Current Liabilities 466.9 512.8 411.8 463.9 Debt/EBITDA 0.0 0.0 0.0 0.0
Total Current Liabilities 1,481.2 1,632.7 1,353.2 1,458.1 Debt / Equity 0.0 0.0 0.0 0.0
Net Current Assets 1,003.9 1,646.3 1,873.7 1,624.4 Current Ratio 1.3 1.5 1.6 1.8
Application of Funds 4,604.7 5,173.3 5,437.1 5,203.6 Quick Ratio 0.8 0.9 0.8 0.8
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research
* CY16 onwards numbers are as per IND-AS * CY16 onwards numbers are as per IND-AS

ICICI Securities Ltd | Retail Equity Research Page 12

ICICIdirect.com coverage universe (FMCG)
CMP M Cap EPS (|) P/E (x) Price/Sales (x) RoCE (%) RoE (%)
Sector / Company (|) TP(|) Rating (| Cr) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
Colgate (COLPAL) 1,010 950 Hold 24,744 21.9 23.4 25.0 46.2 43.2 38.0 5.5 5.1 4.7 69.8 70.7 68.8 49.8 49.5 48.1
Dabur India (DABIND) 278 305 Hold 50,368 7.2 7.5 8.0 38.4 37.2 38.0 6.5 6.1 5.6 28.0 25.6 25.5 26.4 23.4 22.6
GSK CH (GLACON) 5,246 6,074 Buy 22,079 156.1 176.3 199.2 33.6 29.8 30.5 5.0 4.4 3.8 30.8 30.3 31.3 21.0 21.2 21.7
Hindustan Unilever (HINLEV) 979 978 Buy 188,930 20.3 21.9 24.4 48.2 44.8 40.1 6.1 5.6 5.1 177.7 195.4 247.2 154.9 177.3 232.1
ITC Limited (ITC) 277 300 Buy 347,639 8.5 9.6 10.4 32.7 28.9 28.9 6.4 6.0 5.3 44.4 49.0 50.3 31.0 34.6 35.4
Jyothy Lab (JYOLAB) 365 397 Buy 6,690 8.8 10.9 13.3 41.3 33.6 29.9 4.0 3.5 3.2 16.4 17.8 22.8 14.7 17.4 20.0
Marico (MARLIM) 313 341 Hold 40,641 6.3 6.9 8.4 49.7 45.3 40.4 6.9 5.9 5.0 44.6 45.1 49.4 34.9 34.6 37.7
Nestle (NESIND) 6,821 7,420 Buy 63,637 103.9 133.4 154.5 65.7 51.1 48.0 6.8 5.9 5.3 34.9 36.7 44.3 36.2 40.0 44.1
Tata Global Bev (TATGLO) 153 147 Hold 9,041 8.2 8.8 9.4 18.6 17.4 15.7 1.3 1.2 1.1 9.5 9.9 10.1 8.0 8.7 8.7
VST Industries (VSTIND) 3,006 3,320 Hold 4,790 108.3 127.1 150.8 27.8 23.6 22.0 5.1 4.5 4.0 45.0 47.2 49.5 31.1 32.8 34.8
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 13

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research Page 14

ANALYST CERTIFICATION
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ICICI Securities Ltd | Retail Equity Research Page 15