Shares of Nestle India advanced 32 percent so far this year and added around Rs 35,000 crore in market capitalisation, outperforming the benchmark Nifty, which rose around 12 percent. If outperformance and validation is something that one requires and in this year itself, in 2019 Nestle was added on to both the Nifty 50 and the Sensex 30 frontline indices for the market.
Here are a handful of reasons why the stock outperformed:
Everyone is talking about consumer slowdown and low offtake. Nestle outperformed the industry. It was resilient despite the economic slowdown and there are a handful of reasons for that as well.
It delivered 11 straight quarters of strong growth which was both value and volume-based in the domestic segment.
They had a strong product pipeline. In the last 3 years they have launched 61 new products since 2016. So that aided that outperformance. They also increased distribution from 3.5 million outlets in 2015 they moved to 4.6 million outlets in 2019. So more products, more stores, more revenue.
Over and above that 75 percent of their revenue comes in from urban India. So the rural slowdown relatively insulated from that. More products, more stores and in a place which was not as bad in terms of an offtake that meant only strong revenue growth over the last 11 quarters, in fact Q3 CY18 17.5 percent growth continuing into double digits at least for the last few quarters.
Going forward they have a few triggers. The first one is the launch of newer products like Maggi Upma as well as Maggi Poha. So breakfast maybe aiding their revenue as well and the company themselves said that they are targeting merely 48 products launching every year. So that’s 2 new launches every month, much more than the company has done prior to this.
The other thing we will be watching out for, they are looking to increase their penetration into rural India. So any sort of demand recovery from that could mean further impetus to their volume. However, just keep an eye on input prices.
This year we have been speaking about – there has been some inflation in their key inputs, the likes of milk etc., we have seen that in the decline of their gross margins. So this is one data point I will be watching out for and a small little niggle, the issue with regard to anti-profiteering is a small overhang – that is something we will be talking about.
However, after this 32 percent upmove in this year the stock which was very expensive at the start of 2019 at 52 times has only got in much more expensive at 63 times the start of 2019.