Nestle to remain market leader in baby food and noodles segments

Nestle India Ltd commands 85% of the Rs1,500 crore infant foods and nutrition market with brands such as Cerelac and Nestum (infant foods) and Lactogen, Nestogen and Nan (infant milk). Farex from Heinz India Pvt. Ltd is its key competitor in infant foods.

Nestle’s baby food and nutrition comprise 66% of the company’s category sales. We believe Nestle has strong pricing power and superior profit margins in baby foods, which boosts profitability of the segment relative to Nestle’s average gross margins.

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The government’s regulations make India a tough market to operate in for infant foods and nutrition. India’s guidelines regarding the formula for infant foods are stricter than those of some of its neighbours and advertising in the category is banned.

Nestle complies with the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992 (IMS Act) and World Health Organization codes.

Infant food and nutrition as a category will grow 10-12% and Nestle is well placed to capture growth in this category because it is at the forefront of infant foods technology.

It has introduced innovations such as Nan 2, 3 and variants of Lactogen and Nestogen. Nestle has launched Nido, aimed at nutritional needs of children aged over two years. The company has strong technological support from its parent company, which has brands such as Gerber, Mucilon and Naturnes that can be launched in India.

Nestle has 80% market share in the Rs1,300 crore instant noodles market. Nestle is credited with creating and nurturing the instant noodles category in India 25 years ago. Instant noodles comprise nearly 70% of India’s noodles market.

Maggi noodles account for 80% of the prepared dishes category for Nestle, which has other products such as ketchup and soups in this category. Noodles have been the category growth driver in the recent past. The category has given Nestle volume growth of 25% in the past three years and noodles have grown at more than 30%.

Instant noodles grew 30% in 2008 and are tipped to post a compounded annual growth rate (CAGR) of 18-20% over the next few years. Instant noodles have emerged as a viable snacking and food option in India. We believe the category will continue to drive high double-digit growth.

Nestle’s monopolistic position in baby foods and noodles has given it stronger volume growth and higher margins than its peers over the past five years. However, over the past five years, Nestle’s gross margins declined by 400 basis points due to rising input costs, lower price increases, and promotion of small packs. Earnings before interest, tax, depreciation and amortization (Ebitda) margins have been sustained at 20-21% due to lower ad spendings and strong operating leverage.

Nestle’s profit after tax (PAT) grew 20% over 2004-08, 30% in the past two years. Robust PAT growth and increased asset turns enabled return on equity to increase from 55% in 2004 to 120% in 2008. Free cash flow rose to Rs450 crore in 2008 from Rs250 crore in 2004.

Nestle is the best play on the emerging growth opportunity in the processed food segment.

Illustration by Shyamal Banerjee and Graphics by Yogesh Kumar/Mint

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