We downgrade Nestle to ?neutral? from ?outperform?, with a target price of Rs 4,803, given the somber medium-term growth outlook and change in strategy. Portfolio rationalisation, coupled with a weak demand environment, continues to impact Nestle?s domestic revenue growth.
Etienne Benet?s first comments since taking over as the MD imply a restructuring of the product portfolio as well as near-term pain on the demand environment as well as input costs.
The change in strategy as well as focus on premium and value-up ranges will essentially mean continued phasing out of the low SKU portion of the portfolio that does not provide adequate return on investment as well as possibly exiting non-profitable segments. We believe this will result in volume pressures in the medium term and also that Nestle?s new capacity will take longer to be effectively utilised.
The constant increase in margins has now come to a halt; in the current demand scenario, a steep price increase to pass on higher input costs is unlikely and, hence, margin expansion from the elevated levels is unlikely.
The strategy under the new MD seems to be one of aligning with Nestle Global and phasing out lower margin and non-core products. This implies that the incremental capacities and increased distribution coverage will take longer to get effectively utilised. We believe Nestle would do better to play across the value spectrum to increase penetration across its product categories.
