Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt programmes of Nestle India Ltd (Nestle India).

 

The ratings continue to reflect the leadership position of Nestlé India in several product categories, well-established brands and diversified revenue profile, ably supported by an extensive distribution network. The company also enjoys technical and research and development (R&D) support from its parent, Nestlé SA (rated ‘AA-/Stable/A-1+’ by S&P Global), which is the world’s largest player in the branded and packaged foods industry. The financial risk profile of Nestle India is healthy, aided by strong cash accrual, minimal debt and superior liquidity. These strengths are partially offset by exposure to intense competition in the fast-moving consumer goods (FMCG) sector and susceptibility to volatility in raw material prices.

 

Nestle India reported healthy operating performance during the 15-month period through March 2024 (January 2023 to March 2024; the company changed its reporting period from calendar year to fiscal year from fiscal 2024) with  revenue of Rs 24,394 crore reported for the 15-month period (Rs 16,897 crore for 12 months in calendar year 2022), driven by strong double-digit performance across all its segments with steady volume growth led by strong performance in confectionery and beverages segment constituting about 29% of revenue followed by high growth in milk products and nutrition portfolio constituting about 41% of revenue and prepared dishes and cooking aids portfolio. Revenue growth is expected to moderate in the current fiscal, as indicated by 2% growth clocked in the first six months ended September 30, 2024, due to subdued urban consumer demand caused by high food inflation and floods. However, growth over the medium term will be driven by increasing penetration levels, new launches, premiumisation and strategic price actions to be taken by the company combined with revival in rural demand in the current fiscal due to comparatively normal monsoon.

 

Operating margin improved ~215 basis points (bps) to 24% in fiscal 2024 (15-month period) on account of decline in key raw material prices and cost optimisation initiatives undertaken by the company. Meanwhile, coffee and cocoa prices remain elevated and monitorable. The operating margin is expected to remain healthy in the medium term. However, fluctuations in input cost will remain a key monitorable.

 

Earlier in calendar year 2022, Nestle India announced its intent to invest Rs ~5,000 crore (and subsequently increased it to Rs 6,000 crore) as part of its ongoing capital expenditure (capex) plans to ramp up existing and new capacities pan-India across its product portfolio. Till date, the capex was funded by internal accrual and liquidity available with the company. While the company is expected to onboard debt to partly fund the capex, the financial risk profile is expected to remain strong supported by healthy cash accruals of Rs 1462 crore for 15-month financial year ended 31st  March 2024 and strong liquidity position which the company maintains.

 

Additionally, Nestle India has entered a joint venture (JV) with Dr Reddy’s Laboratories Ltd (Dr Reddy’s) to expand its nutraceutical offerings. The company has invested Rs ~706 crore for acquisition of 49% stake as of September 2024. The JV company has been operational since the second quarter of fiscal 2025. Any large acquisition or incremental capex will be a key monitorable.

Analytical Approach

CRISIL Ratings has followed a standalone approach to assess the credit risk profile of Nestle India.

Key Rating Drivers & Detailed Description

Strengths:

• Strong business risk profile, supported by leading position in several product categories, well-established brands and diversified revenue profile: Nestlé India is a leading player in the Indian FMCG industry, with established market position in most product categories that it is present in. The company is a pioneer in the culinary segment, with a range of products under the Maggi brand. It is among the top two players in most of its product categories, including milk products and nutrition, beverages, prepared dishes and cooking aids, and chocolate and confectionery. In these segments, Nestle India benefits from its well-established brands.

 

Revenue is diversified as of March 2024, with 40.7% generated from milk and nutrition products (dairy products and weaning foods), 12.4% from powdered and liquid beverages (instant coffee, iced tea and other beverage vending mixes), 30.4% from prepared dishes and cooking aids (the Maggi range), and 16.5% from chocolates and confectionery (including Kit Kat and Munch). The company has launched over 145  products since 2018, with revenue contribution from new products increasing from 3% in calendar year 2018 to over 7% in calendar year 2023.

 

• Continued technical support from Nestlé SA: Most of Nestlé India’s brands are part of the parent’s international portfolio. The company enjoys access to its parent’s proprietary technology and strong R&D capabilities. Switzerland-based Nestlé SA holds 62.76% stake in Nestle India and is the world’s largest player in the food and beverages sector. Nestle India launched GERBER, its global premium toddler nutrition brand in July 2022.

 

• Healthy financial risk profile: The financial risk profile is robust, supported by strong operating cash flow and comfortable capital structure with negligible debt. Despite volatility in raw material prices, changes in product mix and prudent cost management have ensured a stable operating margin of ~24% in fiscal 2024, resulting in sustained strong cash flow. Despite its intent to undertake capex of Rs ~6,000 crore to further expand its product portfolio, set up new plants and make suitable acquisitions, the financial risk profile is expected to remain strong, with healthy cash accruals expected over the medium term and low gearing. Till September 2024, the capex was fully incurred through internal accrual, while the remaining capex is expected to be partly funded through a mix of external borrowings and cash accrual.

 

Weakness:

• Susceptibility to intense competition: The domestic FMCG segment is highly competitive with the entry of new players, including multinationals, in various divisions such as instant noodles, packaged foods, beverages, chocolates and confectionary. Competition keeps increasing owing to aggressive product launches, evolving consumer preferences and strong marketing strategies adopted by players.

Liquidity: Superior

While cash and cash equivalent declined from Rs 798.85  crore as on March 31, 2024 to Rs 122.56  crore as on September 30, 2024, due to higher spends on capex and investment made in the JV with Dr Reddy’s amounting to Rs 706 crore, liquidity is expected to improve, with strong net cash accruals expected over the medium term. Liquidity is also supported by minimal utilisation of fund-based limits and nil external term borrowings. Net cash accrual remains healthy even after the dividend payout amounting to Rs 3,008 crore in the 15-months financial year ended 31st March 2024.

 

Environmental, social and governance (ESG) profile:

CRISIL Ratings believes Nestle India’s ESG profile supports its strong credit risk profile. The FMCG sector has moderate environmental and social impact, primarily driven by its raw material sourcing strategies, waste-intensive processes, and direct impact on the health and wellbeing of its customers.

 

Key ESG highlights

• The company has undertaken focused efforts towards reduction in Green House Gas emission with initiatives such as usage of cleaner fuel and replacing heavy oil and improvement in energy efficiency with addition of green power. During 15-months financial year ended 31st March 2024 , nine energy reduction projects were undertaken at various factories which will result in substantial annualised savings of approximately 50,000 gigajoules.
• The company had undertaken water initiatives at different factory locations and increased recycling of treated wastewater through effluent treatment reverse osmosis (RO) plant and additional RO plant for recycling. During 15-months financial year ended 31st March 2024. , various water saving projects were executed which resulted in water savings of 136,213 m3/year.
• The company works with farming communities to ensure sustainable production in the long-term. It has a strong preference for local procurement of raw materials.
• During fiscal 2024, 60-75% of inputs were sourced sustainably.
• Nestle India has adequate governance structure, with 63% of its board comprising independent directors, presence of investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Nestle India’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence.

Outlook: Stable

CRISIL Ratings believes Nestlé India will continue to benefit from its leading market position in key FMCG segments, healthy operating efficiency and strong parent support. The financial risk profile is expected to remain healthy over the medium term, supported by adequate cash flow and healthy capital structure.

Rating sensitivity factors

Downward factors

• Erosion in market share in key business segments, constraining cash generation
• Large, debt-funded capex or acquisition, weakening the financial risk profile with gearing increasing significantly above 0.5 time on sustained basis
• Substantial decline in liquidity leading to moderation in the financial risk profile of the company

About the Company

Nestlé India (62.76% owned by Nestlé SA) began trading operations in India in 1912, as Nestlé Anglo Swiss Condensed Milk Company (Exports) Ltd. Nestlé India commenced manufacturing operations in 1961 by setting up a plant in Moga, Punjab. The company manufactures products under four categories: milk products and nutrition, powdered and liquid beverages, prepared dishes and cooking aids, and chocolates and confectionery. It has nine manufacturing facilities in India - at Moga; Samalkha, Haryana; Nanjangud, Karnataka; Ponda and Bicholim, Goa; Choladi, Tamil Nadu; Pantnagar, Uttarakhand; Tahliwal, Himachal Pradesh; and Sanand, Gujarat.

 

In April 2024, Nestle India entered an agreement to form a 51:49% JV with Dr Reddy’s (51%) to expand its nutritional offerings. The JV has been formed with Dr Reddy’s holding 51% and Nestlé India 49% with a call option to increase shareholding up to 60% for Nestle India after six years at a fair market value. Nestle India has made investments of Rs ~706 crore towards this JV.

Key Financial Indicators*

As on/for the period ended	Unit	2024#	2022$
Revenue	Rs crore	24,394	16,897
Profit after tax (PAT)	Rs crore	3,933	2,391
PAT margin	%	16.1	14.1
Adjusted debt^/adjusted networth	Times	0.10	0.11
Interest coverage	Times	41.22	43.96

*CRISIL Ratings-adjusted numbers

^adjusted debt includes lease liabilities

#For 15 months ended March 2024 due to change in reporting period

$For 12 months ended December 2022

Any other information: Not Applicable