Not only have Nestle India?s absolute growth/return metrics deteriorated in the recent years, the company has also underperformed competitors. Rich valuations demand a turnaround, which we do believe will happen at some point. Maintain ?sell? with a target price of R4,500 a share.
Nestle?s strong belief in its strategic drive towards a more ?value-added? portfolio, while slowly moving away from ?price-point packs?, remains unchanged. That the company?s performance (volume growth, value growth, EPS growth, return ratios) has deteriorated in the recent years is a fact. What is arguable is whether the company?s strategic choices have led to the deterioration.
The debate around any key strategic shift is never a short-term one; even as the initial results of portfolio rationalisation do not encourage, attributing the recent underperformance to the portfolio-related strategic choices is, at best, conjecture.
We do think, however, that some of the SKU-related decisions that Nestle has taken in the recent years, especially a reluctance to be in the low-price SKUs, may be suboptimal in certain cases ? essentially due to reduced competitiveness in the new user recruitment market.
Losing the mindshare of these low profitability ?new? users when they are entering the category as consumers is a risky bet, even from a medium-to-long-term perspective. At a P/E multiple of 37X forward earnings, we find Nestl??s valuations expensive given volatile volume growth, weakening consumption trends and significantly lower-than-historical return ratios.
Kotak Institutional Equities
