Suresh Narayanan led Nestle India is doing best in its class strategy, strong execution capabilities, and an emphasis on quick, decisive action. The company is getting benefits from a rise in consumption of ready-to-cook (RTC) products in a post-COVID world, several new launches and entry into new sub-categories, a shift from unorganized to the organized sector, enhanced distribution reach and so on. We forecast volume-led earnings growth of 5/16/16% in CY20F/21F/22F. However, the current valuation leaves little room for error. We initiate at ‘neutral’ with a TP of Rs 17,250.
Several expectations are being made that the consumption of RTC foods will increase in a post-COVID world and Nestle India products will come handy. Nestle products under the RTC category — Maggi Noodles, Pazzta, Upma, Poha — could face a significant increase in demand.
Moreover, the company is launching innovative products at 3x the pace of 5 years ago and these products are showing a positive success rate. New launches in several categories have contributed up to 4% to revenue over the past 4 years.
Meanwhile, Nestle India is adopting a new regional cluster-based approach to enhance efficiency. This approach is more consumer-centric and is helping the company to identify new opportunities with better RoIs.
We initiate coverage of Nestle India with a ‘neutral’ rating and a TP of Rs 17,250. We value Nestle at a P/E of 65x on March’22F EPS, at a 20% premium to its past 3-year average multiple. However, at 66xCY21F EPS, we expect the valuation is factoring in these positives.