Nestle India Counting On Election-Led Reforms For Consumption Revival

Nestle India Ltd. is hopeful for economic reforms in an election year and moderating inflation to bring about a revival in consumption, albeit gradually.

The packaged consumer goods maker has seen the equation between value and volume growth change in the last two years.

Nestle's volume trailed value growth as unprecedented inflation forced the owner of brands like Nescafe, Kitkat and Maggi to hike product prices. In 2022, Nestle's top line grew 14%, with volume growth of 4%. In 2023, its top line rose 13%, of which 5% was volume-driven.

All this while, Nestle outperformed peers as the urban nature of its portfolio helped in better absorption of price hikes. But during the October-December quarter, the pace of revenue growth slowed to 9% over the previous year as price growth lagged. The volume growth, estimated at 3%, was weaker than the historic trends of high-single digits.

But Nestle India Chairman and Managing Director Suresh Narayanan is confident the company will get back to driving volume-led growth "once things start to stabilise a bit more". Although he said that "it won't be a cakewalk", warning of near-term volume growth headwinds.

"A lot is hoped for on the elections and the economic activity around it," he said, during a post-earnings media briefing. Recently, the government has raised the allocation on developing infrastructure projects to Rs 11.11 lakh crore. "This will definitely create jobs, add to [household] income levels, a lot of which will flow into consumption of essentials."

On commodities, he said, coffee prices continue to be volatile and are historically high due to limited availability. Except coffee, however, the prices of all other commodities are largely stable. Narayanan doesn't see the need for further hike prices if the current trends continue.

"Food inflation looks relatively benign this year and therefore, we expect that with an infusion of investment and incomes into the economy, there will be an uptick," he said. Currently, household consumption is showing polarity—more affluent Indians are lapping up premium goods while the mass market is showing “signs of stress", he said.

However, India's long-term consumption story remains intact, said Narayanan. To stay ahead of the curve, the company has stepped up its capex to build production capacities. While Rs 3,200 crore worth of investments has been utilised between 2020-2023, it is on track to spend another Rs 3,300 crore in the next two years.

"What we are spending in five years is more than what we have spent from inception till 2020," according to Narayanan. The company is investing 7-8% of its turnover on capacity expansion, compared to 2-3% previously.

With new capacities coming in, Nestle expects 12% revenue CAGR to sustain. "If you look at our 2016-2022 performance, it's been about 11-12%. We will be happy if we are able to deliver that on a larger base."