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 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’s operating performance is expected to be healthy in calendar year 2023, with estimated early double-digit revenue growth and operating margin of 22-23%. Revenue grew nearly 15% year-on-year for the nine months ended September 30, 2023, supported by healthy growth in milk and nutrition products, chocolate and confectionary, and powdered and liquid beverage segments. The operating margin has improved because of moderation in raw material prices. Fluctuations in input cost will remain a key monitorable.

 

Earlier in the year 2022, Nestle India announced its intent to invest Rs 5,000 crore by 2025 as part of its ongoing capital expenditure (capex) plans to ramp up existing and new capacities pan-India across its product portfolio. While the company is expected to onboard debt to fund the capex, the financial risk profile is expected to remain strong, supported by above-average net cash accrual and healthy liquid surplus cash equivalent of Rs 1,015 crore as on December 31, 2022. Additionally, it has investments in tax-free bonds worth Rs 708 crore. Any large acquisition or incremental capex will be a key monitorable.

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 September 2023, with 40.5% of the revenue generated from milk and nutrition products (dairy products and weaning foods), 11.1% from powdered and liquid beverages (instant coffee, iced tea and other beverage vending mixes), 31.6% from prepared dishes and cooking aids (the Maggi range), and 16.8% from chocolates and confectionery (including Kit Kat and Munch). The company has launched over 125 products since 2016, with around 10 projects in the pipeline. Revenue contribution from the new products increased to 6.1% as of September 2023 from 1.5% in 2016.

 

• 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 research and development 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. Despite volatility in raw material prices, changes in product mix and prudent cost management have ensured a stable operating margin of ~22%, resulting in sustained strong cash flow. Nestle India announced its intent to incur Rs 5,000 crore capex till 2025, to further expand its product portfolio, set up new plants and make suitable acquisitions. This is expected to be funded through a mix of external borrowings and cash accrual. It is currently setting up a new unit in Odisha (its first manufacturing facility in East India) at a total cost of Rs ~800-900 crore.

 

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

Cash and cash equivalents declined from Rs 1,755 crore in 2020 to Rs 719 crore in 2021, as the company shifted from a defined benefit plan to defined contribution plan (Rs ~927 crore in 2022). Liquidity remains superior, with cash surplus and liquid investments of Rs 1015 crore as on December 31, 2022. Additionally, it has investment of Rs 708 crore in tax-free bonds as on December 31, 2022. 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 2,024 crore in 2022.

 

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 2022, nine energy reduction projects were undertaken at various factories which will result in substantial annualised savings of 0.59% of total annual energy consumption.
• 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 2022, seven water saving projects were executed which resulted in water savings of 148,654 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 2022, about 73% of inputs were sourced sustainably.
• Nestle India has adequate governance structure, with 62% 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 the 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.

 

Nestle India is currently setting up a new unit in Odisha (its first manufacturing facility in East India) at a total cost of Rs ~800-900 crore. While land acquisition and approvals are currently in place, the plant is expected to commence operations in fiscal 2026.

Key Financial Indicators*

As on/for the period ended December 31	Unit	2022	2021
Revenue	Rs.Crore	16,897	14,741
Profit After Tax (PAT)	Rs.Crore	2,391	2,118
PAT Margin	%	14.1	14.4
Adjusted debt^/adjusted networth	Times	0.11	0.13
Interest coverage	Times	43.96	67.34

*CRISIL Ratings-adjusted numbers

^adjusted debt includes lease liabilities

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Long-term debt#	NA	NA	NA	1010	Simple	CRISIL AAA/Stable
NA	Short-term debt#	NA	NA	7-365 days	700	Simple	CRISIL A1+
NA	Bank guarantee	NA	NA	NA	54.5	NA	CRISIL A1+
NA	Letter of credit and bank guarantee	NA	NA	NA	150	NA	CRISIL A1+
NA	Letter of credit and bank guarantee*	NA	NA	NA	200	NA	CRISIL AAA/Stable
NA	Overdraft facility	NA	NA	NA	20.1	NA	CRISIL AAA/Stable
NA	Proposed long-term bank loan facility**	NA	NA	NA	113.41	NA	CRISIL AAA/Stable
NA	Working capital facility	NA	NA	NA	251.99	NA	CRISIL AAA/Stable

#Not yet issued

*Fully interchangeable with fund-based facilities

**Fully interchangeable with non-fund-based facilities