Nestlé India Limited (500790) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the session. We will now start the proceedings. [Operator Instructions] Kindly note, the entire session is being recorded. I will now hand over to the Nestlé India team. Over to you, sir.

Thank you. Good afternoon, everyone. Welcome to the Nestlé India Financial Analyst and Institutional Investors Webcast. I'm Shashank Kumar Nair, Senior Manager of Corporate Communications, Nestlé India. I have with me today my senior colleagues from the Nestlé India management team; Mr. Suresh Narayanan, Chairman and Managing Director; Mr. David McDaniel, Executive Director of Finance and Control and Chief Financial Officer; Mr. B. Murli, Director, Legal and Company Secretary; and Mr. Sanjay Khajuria, Director of Corporate Affairs. Now before we get started, let me first read out the standard disclaimer. This presentation may contain statements, which reflect management's current views and estimates and could be construed as forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which holds only as of the date. The future involves uncertainties and risks that cause actual results to differ materially from the current views being expressed. Potential uncertainties and risks, but are not limited, to factors such as changes in general economic, political or market conditions, commodities and currency fluctuations, competitive product and pricing pressures industry relations and regulatory developments. Significant disruptions in operations due to unforeseen event, including as a result of the spread of the disease. Volume and mix and organic growth are basis Nestlé internal reporting standards. Figures are regrouped, reclassified to make them comparable. Calculations are based on nonrounded figures. Analytical data are best estimates to facilitate understanding of business and not meant to reconcile reported figures. Answers to questions may be given basis generally available information. The entire proceedings are being recorded and will be uploaded on our website, www.nestle.in. As for the agenda today, we will have a presentation from Mr. Suresh Narayanan, followed by the question-and-answer session. I will now request Mr. Narayanan to please take over and make his presentation.

Thank you. Thank you, Shashank. Good afternoon, ladies and gentlemen, and good afternoon to all of you. I also especially would like to welcome those who have joined us from overseas for this analyst meet. And I'm delighted that this has been fulfilling, a long-standing request from some of you that we should have more frequent interactions with you on the company, its performance and its prospects. We met a couple of months back and I'm delighted, once again, that we have afforded this opportunity today. I title whatever I have to share with you today as a report card of a resilient organization. As we go through a storm, there are 3 characteristics that I believe are extremely important to organizations. One is the quality of people and the quality of brands. Second is a tenacious spirit, a spirit that is never say die, and that gives them the strength and the fortitude to combat the future. And finally, resilience. And resilience is an important characteristic of many organizations, and I'm sure that this is a facet that you would all agree with. So if we are a resilient organization, there are certain principles that we follow in making ourselves resilient. Our vision is very simple. It's very straightforward. It is focused on 5 Ps: people, purpose, planet, partnerships and performance. Fundamentally, the [indiscernible] of the organization is defined by the purpose and values. Ours is to unlock the power of food to enhance the quality of lives of people, of generations that are here today and that are yet to come. Planet, we are all part of an environment that is constantly going through stress, and what contribution a company makes to it is certainly important in the context of the overall health of the planet. Partnerships, the reason why Nestlé is successful as a company is fundamentally due to the partnerships that it has made over decades, I dare say, over centuries in some parts of the world. People, and fundamentally, this is the building block of an organization. And this -- on this entails the performance and the prospects of an organization. And finally, the performance itself. So in holistic terms, these are the 5 Ps that we would like to focus upon and what I would like to share with you today. Before we begin, a key highlights of the 2020 results that you've just seen. Firstly, we've had strong domestic sales growth, broad-based and largely driven by volume and mix. The overall sales went up by 8.1%. The domestic sales went up by 8.5%, and the underlying volume growth in this was fairly encouraging and hearty at about 6%. Nearly 2/3 of our key products have been boosted by in-home consumption, and these have posted a double-digit growth. That means that the brand framework and the equity framework of the organization has been reasonably resilient in the storm. Innovation and renovation pipeline continues to be a thrust area. The pace of new product innovations might not have been as large in 2020, but nevertheless, as I will explain to you in a few slides, this is at the cornerstone of who we are as an organization. Demand in the out-of-home channels continues to improve. It has been through some very difficult times during the serious part of the pandemic. But gradually, on a sequential basis, we are getting back to some normalcy, and I do hope that we will be back to normal quite soon. E-commerce continues to contribute better towards domestic sales and I will come to how this has really boosted the fortunes of the company. If you look at on a broad-based basis, the performance has been secular across Milk Products and Nutrition, that's roughly 45% to 46% of the portfolio of the company, has grown by about 9%, strong growth in nutrition and in milk products. So this is something that has been a secular trend as far as this category is concerned. Prepared dishes and cooking aids, which is the MAGGI brand, which contributes about 30.1% of the business, grew at about 11.4%. Again, volume growth, together with value growth. And this has also been something that has actually had a very strong performance. In the last quarter of 2020, the MAGGI brand grew at almost 20%. During this period, ladies and gentlemen, we have added almost 10 million households to the consumption basket of this brand. It is important that the resilience of the brand continues as we get to more normal times. Confectionary has grown at -- by about 7%, and it contributes about 13.6%. And here again, on a quarter-on-quarter basis and, in fact, on a quarter 3 and quarter 4 basis of last year, the performance of brand KITKAT has been salutary. In fact, it has grown by over 20%. And finally, powder and liquid beverages, which is the coffee portfolio, which contributes about 10.5%, shows a muted performance of a little less than 1%, and this is really because of the out-of-home contribution to this brand, which is fairly significant. If you look at the retail segment of the brand, it has grown by over 11%, and we have consolidated our strong market leadership in this category and the prospects also are looking fairly promising. So if we call ourselves a resilient organization, what are the facets that I would like to touch upon here with you today. There are 11 facets that I would like to touch upon very quickly. The construction opportunity, our growth model, a history of sustainable performance, creating shareholder value, a thrust on innovation, rapidly accelerating our footprint, consistent media support to our brands, navigating the commodity headwinds, our people, unwavering commitment to sustainability and tackling climate change and finally, continuing with our proven growth model, which is a model that we have established over a period of time. A consumption story. Why does Nestlé see it for itself a reasonably bright future? And I think any study that you do in here, this is a study that has been done by Bain & Company. There are similar studies that have been done by other consulting companies also by Nielsen and others. That shows that between 2018 and 2030, the simple fact is that India will be adding close to 140 million households, as far as the middle class is concerned, and about 20 million in the high income households. That simply means that the consumption of packaged goods, of branded goods, of goods and brands with a high-quality, with high safety, with good nutrition and with good credentials is likely to have an uptick, and that uptick will definitely benefit Nestlé, the organization. It has been said, ladies and gentlemen, that the time for a man or a woman comes on the planet. I believe that the time for Nestlé has come in this context. Also, most of our brands are very youthful brands. They're very young brands, whether you take KITKAT or you take Nescafé or you take MAGGI. These are very young brands. And India will be blessed to be one of the youngest nations by 2020 with a strong Generation Z and millennials, of who will constitute this population. So 77% of India's population would be what you would call young. And if young people we cannot engage as an organization, then I think it will be an opportunity lost. So the consumption profile, the consumption story, would continue to remain strong. As I have said before, and I continue to maintain, we can be delayed, but we cannot be denied. And that is the consumption story that India would pan out to. So what is our simple growth model? The simple growth model consists of 5 key parameters. Number one, strong cost and efficiency management. Number two, this is an articulated strategy that we have been following for the last 5 to 6 years consistently. And I can say so that ever since I've taken the help of this fine organization, this has been the driving strategy for our performance. Penetration led growth. Many of our categories still enjoy relatively low levels of penetration, getting more households, getting to more areas, increasing the frequency, increasing the depth of consumption. That is a simple, straightforward virtuous cycle that forms the growth engine. Investing and innovating. We have 35 billionaire brands, as they are called in the Nestlé [indiscernible], brands with a sale of more than CHF 1 billion. We have only 9 of them in India. And that tells me, very simply, the theme that I've maintained before. The question is not what to launch. The question is, when to launch. Competitive advantage through R&D expertise. I think this is an area, of course, strength of the company. Nutrition, nutrition credentials, science-based marketing and proposition-based brands is the strong suite of Nestlé. Converting, therefore, raw materials to such products and such brands involves the use of R&D. We have an R&D facility in India in Manesar, which is one amongst the 31 facilities globally. And output from this R&D facility is certainly something that will be of vitally importance to the company as we move forward. And finally, brand salience. Our company is all about brands, our company is all about brand strength. In the pandemic, one of the key features that we have noticed as a shift and this shift, I dare say, is likely to continue for a while, is the fact that consumers prefer trusted brands, prefer better nutrition, better immunity, more safe brands and brands with a longevity and heritage. Every single brand of Nestle is one such. And this is the opportunity that we see. Ladies and gentlemen, in 7 out of 8 categories in which we operate in, we have a leadership position. And this has been so for most of the years that we have talked about. This is, very simply, a growth model. So what have I done as a result? If you look at the volume-led, penetration-led strategy, we've had 10 years of sustainable volume- and mix-led growth. This coming out of the crisis that we had in 2015 has been one of the key mantras that we have used as a company. Even during the pandemic, as you would notice on the right-hand side of the slide, our 8.5% volume growth, which came down to 0.3%, it has sprung back to an almost 8% volume growth in the last quarter of 2020. That means that volume net growth has been a sustainable performance feature as far as Nestlé is concerned. 10 years of, therefore, sustainable domestic value growth. And this has also been a feature that we are extremely proud of. Ladies and gentlemen, in 12 out of the 16 quarters that we have reported results in the recent past, Nestlé India has shown a double-digit growth. In the balance 4 quarters, 3 out of the 4 quarters are very close to 10%. The only quarter where we took a dip, and that was due to the most serious impact of the pandemic in quarter 2 of 2020, it came to 2%. What is more heartening is the fact that in 2020 for the reported results, 3 out of the 4 quarters has been double-digit growth. And that is what gives us the confidence for the future. All this, you can say, you can give, provide empty calories as a company, we are not an empty calorie company. This company also provides the protein for sustenance. So it's 10 years of accelerating profit from operations from 18.5% to about 21.7%, which is 320 basis points of improvement. Even if we take the last 5 years, the last 5 years, the operating profit improvement is roughly on a CAGR basis, about 17%. Again, it is something that we can be proud of. 10 years of accelerating net profit. The last 5 years, average is close to 30% of net profits. So the average turnover growth in the last 10 years, in the last 5 years, is about 10.3%. The operating profit is 16.6%, close to 17%. And the net profit is close to 30%. And in an environment, where we have not invested significantly on CapEx in the last couple of years, there has been a salutary return on invested capital, which in every single year is well above the cost of capital, and indeed, one of the best-in-class as far as the industry is concerned. All this, ladies and gentlemen, has led to significant value creation for the investors. In 2001, your company had a market capitalization of a little over USD 1 billion. At the end of 2020, it had close to $25 billion of market capitalization. This return has been about 35.6x versus the FMCG Benchmark Index of 13.5x. We value the trust. We value the manner in which you have supported this organization. And it is this value engine that we would like to continue for the future. I talked about renovation and innovation, and I talked about the fact that we have a lot of runway ahead that we need to cover. In the last 5 years, innovation and renovation has been a centerpiece of this organization. We have been innovating at a pace that's more than 3x what it was 5 years ago. Almost 80 new products have been launched in the last 5 years. Not all of them have been successful, but almost 70% of them have been successful. What is more important is that the contribution of innovation and renovation to domestic sales has almost tripled in this period from about 1.5% to close to 4.5%. And this engine is not going to stop. You may say, look, it's nice. You have launched so many new products. Are you going to slow down? There is no slowdown here. As I speak to you, there are almost 40 to 50 new innovation projects that are in the pipeline, and that will be consummated in the coming months and in the coming years. We talk about innovation, but one of the critiques of the company has always been that we are an urban-centric company. That Nestlé is more an urban company rather than the rural company. When does the company start to accelerate in rural markets? It starts to accelerate in rural markets when 2 things happen, when there is the convergence of aspiration and when there is a convergence of availability. Now convergence of aspiration is the digital edge, you would agree with me, has been far sharper than what we imagined. Today, the content that is bought on YouTube by a young person in any of the smaller towns or, I dare say, the villages of India, or Bharat, as it were. It's not very different from what is watched by his compatriot in urban cities. Similarly, thanks to the progress that has been made with e-commerce channels, especially during the pandemic. We have seen availability also at arms length as far as these consumers are concerned. It is this that started our journey a few years ago to rapidly accelerate our footprint. On the basis of 5 key vectors: volume penetration, expand the portfolio, deploy suitable structure of people, ensure that our products are visible where they matter, and finally, consumer connect in terms of campaigns, activation and all the things that Nestlé is good at, at the operational level. This has therefore meant that we have strengthened our distribution platforms. This is the total reach and the total -- and both the direct and the indirect reach, which has moved up from about 4 million outlets to about 4.7 million outlets. We will be definitely hitting the 5 million-mark and beyond in the not-too-distant future. What is more important, ladies and gentlemen, is what we are doing in what's called rurban, which is rural and urban, and in the agglomerates that matter. For urban towns, there are 7,935 towns that we cover, and we have been covering it consistently. So that is not the question. The question is, what are we doing about rural India? And here, the exercise started in about 2016, where they were covering roughly 1,000 villages. We had almost an access point, a distribution access point, of a little over 7,000 or close to 7,500 in terms of small distributors and wholesale hubs. We took that in 2017 to about 9,000 villages. In 2018, to about 51,000 villages. In 2019, to about 89,000 villages. And the total number of access points, almost to a figure of about 11,000 to 12,000. Now what is the objective? The objective is that we would like to reach 120,000 villages by the end of 2024, if not earlier. Why do we say that this is an important dimension of the next phase of Nestlé is because the portfolio, the reach, the relevance, the price points are all resonating well with the consumers of Bharat. And therefore, ladies and gentlemen, over a period of time, you will start to see the dial move across the portfolio of the company to see a greater contribution coming from rural markets as well. E-commerce. I think this has been a salutary story, a story that has been done by numerous organizations, but Nestlé is also proud of it. In 2016, we are at about less than 1%, 0.6% of our business coming out of e-commerce. We closed 2020 because our accounting year is from January to December at about 3.7%, so 6x is the growth that we've had, and comfortable amount of investment, innovation and progress has been put behind the e-commerce channels. I hasten to add, this does not mean that we believe that only e-commerce will grow. For us, almost 85% to 90% of our business still comes from the kirana store, the traditional trade. And that has still got a lot of juice left, especially in Tier 2, Tier 3, Tier 4 towns. And yes, talking of Tier 2, Tier 3 and Tier 4 towns, the growth levels that we have seen in these towns, of Bharat as it were, has been a full order of 2x to 3x what urban markets have shown. So it does not mean that urban markets are more and very important for us. It means that urban, semi-urban, rurban and rural are all important for this company as we go forward. In all this, you can say that you have made your numbers by not supporting the brands, that is far from the truth. If you look at this chart, it says that in 2016, if you index it to 100. In 2019 and 2020, we are spending almost 40% -- 30% to 40% more than what we have spent during this period. On a cumulative target basis, you'd find that between 7% to 8% is the kind of support increasing behind our brands. So 10% is the organic growth, 7% to 8% of advertising support is a pretty decent number to talk of. And indeed, during the pandemic, quarter 2 was the only period when we had to take off the advertising support because of obvious reasons, of availability and salience. But thereafter, it has rolled back, once again, to the levels that we would be happy to support. Commodity headwinds. I think this chart shows that commodity headwinds have been the part of this organization. Indeed, if you look at point-to-point, milk has moved up from an index of 100 in 2016 by almost 23% higher in 2020. The same follows with skim milk powder. The same trend follows with wheat with a smaller extent. And of course, only green coffee has been relatively stable. The gross margins of this company, and this is something you guys know much better than I do. If the gross margin of the company does not go up, then there is always a cause of concern. Between 2011 and 2020, the gross margins of our company has moved by almost a little over 500 basis points. And despite the commodity headwinds that we have had, we have still seen the improvement in the overall profitability of the company. In fact, in addition to important and depth strategies in procurement, we also have a very strong strategy called Shark, which is the cost efficiency and management. This has led to in the last 10 years to a saving of almost INR 15 billion or almost, on an annualized basis, 1.5% to 2% of sales being extracted in terms of improvements in the cost and efficiencies in the system. That is the reason why growth and profitability have moved in tandem. At Nestlé, people matter. I said this at the start of the pandemic. And for me, the safety and security of my people is about everything else during this difficult situation that all of us are going through. In overall terms, the employee cost has been relatively flat at about 10%. In 2020, it went up to 11.3%. And this is not something that I am ashamed of. This is a conscious investment during COVID in the safety, security of our people in ensuring that they get the salaries that they should, that they deserve, in terms of getting the increments that they deserve, in terms of getting all the facilities that are important for them to perform and for their families to remain safe during this period. So some of it is one-off costs and some of it, of course, would be related to long-term compensation arrangements. Nevertheless, one of the measures is how is the headcount of the company moved? The headcounts have been relatively flat. As you can see, from 7,600 people, 7,500, now to 7,800 people. It has no substantial change that has happened in this. So we have kept the head counts the same. We have provided what needs to be provided. And of course, the productivity of the organization also has been on the upward trend as the graph above shows you. I talked about planet. And I believe that for Nestle, the planet and contributions to the planet are an important facet of who we are as a company. Showing growth, showing profitability and showing a lackadaisical attitude or a disdain for the environment is not what is the Nestlé model. It is our unwavering commitment to sustainability and tackling climate change. So we are putting our money where our mouth is. If you index 2018 at 100. In 2020, we have almost doubled the sustainability spend. In 2020, ladies and gentlemen, Nestlé, Nestlé India, recycled 20,000 tons of plastic. Today, I'm proud to say that brands like MAGGI, like Nescafé, KITKAT, Milky Bar are plastic neutral, which means that the quantum of plastic that is being used in the packaging is compensated by what we collect and what we recycle. There are 4 themes to recycle -- to the climate chain story that is important for the company. And these are where investments are being made. These are, ladies and gentlemen, the investments that need to be made in the interest of society, of the planet and of the business. Sustainable packaging. I talked about that. Commitments on water in the last 5 years, the usage of water per ton of product has halved. Responsible sourcing. I think that is an important aspect of who we are as a company. And of course, there is a clear objective to reach net 0 as far as greenhouse gas emissions is concerned by 2050, and we are also swoon to that as an organization. So finally, what is it that makes this company operate the way it operates. There are companies that could show flashes in the pan. There are some other companies that are known to be consistent. Companies that are known to be resilient. Companies that are known to keep their purpose and values and the spirit at the center of who they are as a company. Your company, Nestlé, is one such. And therefore, to reiterate the principles of what will make our model sustainable over a period of time, strong cost and efficiency management. This is not a profligate company. This is a company that is careful in what it does, how it spends. But where it needs to invest, it will invest. So in supporting brands, in sustainability, in areas that are important and vital to society and vital to the community and vital to India, it will invest. We've talked about investing in new factories. Capital expenditure has been announced at INR 26 billion for the next 3 to 4 years. As I speak to you, the factory, the ninth factory in Sanand is coming up. I do hope to be able to commission it by the end of the year. And yes, I committed to you on diversity in that factory. Today, I'm delighted to announce to you that 70% of the recruitment that has been done at that factory, and we have to recruit people in advance because we believe in training our people before they start working. 70% of them are women. So I would like this factory to be a lighthouse, not just for the Nestlé group, but for India in the deployment of women as operators and women in other responsible positions that can sustain this organization for the future. Penetration-led growth. We talked about it, and there are numerous brands and numerous initiatives that have all been on the foundations of penetration-led growth. Investing and innovating. I would like to assure you that this company is not going to sleep at the wheel and address on its laurence -- of launches that it has done in the past. We are aggressive. We will fail to succeed, if that's what is a learning that we need to succeed to succeed. And I think it is important because unless the investing and the innovation journey is not carried forward, the journey of this organization would be incomplete in the opportunities that it enjoys. Competitive advantage through R&D and expertise. This means not just the introduction of new products, it also means introduction in new categories, and that's an area that the company is aggressively leading at in order to sustain it. And as you know, Nestlé is a long-term innovative company. It seeks to invest in brands over an extended period of time. It does not give up on its efforts simply because there has been a pandemic or simply because there has been something that has stopped in our tracks at any point in time. And finally, the love, support, the trust and the commitment that consumers have given our brands is what keeps this company going. Therefore, ladies and gentlemen, I would like to end by saying that we can have our ups and downs as an organization, we can have our ups and downs as a country, we can have ups and downs as a society. But your company, Nestlé India, is here to stay after 108 years for a longer period of time in the same resilient, positive, respectful, spirit that it has adopted for all these years. Thank you very much, and we would now, of course, be open to questions as they emanate.

[Operator Instructions] We have the first question from the line of Mr. Harit Kapoor, Investec Capital Services.

Am I audible?

Yes, you are.

Yes. Suresh, I had 2 questions. The first question was, if you look at the infant nutrition category, it's a category which probably has extremely low penetration from your end in the marketplace. And it is probably not seen the kind of growth that probably some of your other categories would have grown. If you could just give us a sense on how do you see the category growth for you as a market leader going forward over the next 3 to 4 years? Do you feel that it could track historical growths or there could be an expansion in terms of growth rates here, given that you are now significantly penetrating in terms of distribution? That's my first question.

Thank you, Harit, for your question. It's a very good question. Look, I would firstly like to add a comment to begin with. That, at Nestlé, we believe fervently that breastfeeding is the best for your child. That's what [indiscernible] and therefore, this -- whatever comments I make on the nutrition and milk business of the company is not seeking to expand it -- the category in any sort of suspicious way. Having said that, I believe that the growth record for the mills and nutrition portfolio will continue to be relatively strong as I go forward for 3 simple reasons. One is as the women participation in the workforce increases, and that is something that is clearly the hope in the economy. There would be a need for nutrition for the children in case the mother is not able to breastfeed for any particular reason. So that's number one. Number two, as you rightly said, Harit, aspiration for better, wholesome and more complete nutrition for the child is an aspiration of every mother and father in this country. And in fact, in the smaller towns, there is the same aspiration that is there in the larger cities. And therefore, as we expand our footprint, I do see a positive impact of this rubbing off as far as the milks and nutrition business is concerned. Number three, we are not going to be resting on our laurels. We know that there is a responsibility that we have in terms of innovating in this category and innovating with new offerings and with more salient offerings. This would also continue into the future. So I would like to give you the assurance that the category will receive the utmost attention in terms of reach, in terms of penetration and in terms of innovation.

My second question was on pricing. So you are seeing inflation of key commodities over the last few months. Just wanted to get your sense on how do you look at pricing in the current context? Have you already made certain pricing changes and how are you seeing that? Do you believe the market is strong enough to find of take on price increases from your end? Yes, that's it from me.

Harit -- again, a good question, Harit. I think commodities, if you look at core commodities, commodities like milk, for example, Milk, I know we are supposed to be done in the flush season for milk, but the milk prices have not dipped. I think it's for 2 reasons. One is that the out-of-home demand and the demand from other catering channels has significantly increased. That's good for the industry. So let me hasten to add, it's good for the dairy industry because they were suffering during the pandemic. So that demand is clearly coming up. And secondly, as a consequence of the pandemic, there has been an impact on the milch herd and on the level of nutrition that has been provided to milch cattle during this period. And therefore, the productivity levels also have been relatively muted. As a consequence of this, there will be, I reckon, an escalation of milk prices that we will see or at least no bearish trend as far as milk prices are concerned. And if you look at it on a larger basis, Harit, food inflation, is certainly higher today as compared to [indiscernible] inflation. And as a result of all the fuel price hikes that is also taking place, there will be a concomitant impact on raw material prices. At the moment, our strategy of penetration-led volume growth has not been delayed. And as I mentioned to you in my presentation, there are strong plans that we have, or Project Shark, as we call it, within the organization has kicked in in a very strong manner to look at efficiencies and to look at effectiveness in what we do. But yes, if it really becomes very, very difficult. We will have to take some decisions on the portfolio. But as of now, we are here watching the situation and kind of observing what is happening.

We have the next question from the line of Mr. Jay Doshi, Kotak Institutional Equities.

I have 1 question. Over the past decade, your employee costs and other expenses have increased from about 31% of sales to about 34% ballpark numbers, whereas the same for most of your peers would have reduced by 400 to 500 basis points. So can you please talk a little bit about your cost savings program? And how do you think about operating leverage going forward?

I think, look, in terms of employee costs, I think what we do is a combination. The head count that we keep is a head count that we maintain. We have not dramatically changed our headcount. And the average level of salaries that we pay are on a region-cum-industry basis. So it is not completely out of whack. There has been, of course, with the investments that we have made in particular parts of the infrastructure of the company. There have been some increasing costs that you might have seen. Certainly during the COVID times, there have been increasing costs, and I'm -- I have a clear rationale for it. It's not prolificacy, it is empathy and compassion to ensure that people are taken care of during this period. And as we improve the overall volume throughput of the company, I think this will start to stabilize over a period of time.

Since you're planning to invest on distribution expansion, will cost as a percentage of sales, other expenses as well as employee continue to trend -- remain at similar levels over the next 3 years? Or should we expect it to moderate gradually?

I would reckon that in a way where we don't give you a forward projection on what we're doing. At least in strategic terms, what we would like to do is that the investments that we will be making in the infrastructure should be commensurate with the kind of return that we get in terms of incremental sales and growth. And therefore, overall terms, it should not be hurting the cost line, at least, that is the expectation from the infrastructure expansion.

We have the next question from Mr. Prasad Deshmukh, Bank of America.

Sir, 2 questions from my side. One, could you please let know as to how the cluster model -- cluster-based model worked during COVID disturbances, mainly in the context of the movement of human resource, et cetera? And are there any changes you had to do as a result of this?

A good question. I think the cluster model, which has been set up a couple of years ago, has in fact been reinforced during the pandemic with a very strong overlay of data and analytics competence that we have built as a company. It's called MIDAS, and this is something to give us a better capability to geo target products, brands, SKUs and launches over a period of time. Now one of the constraints in the pandemic has been, as you rightly said, in terms of the movement of people. So therefore, cluster operations wherever people were able to move to locations has been implemented. But where it has not been possible. It has been -- and where it is, it is remotely managed. I'm afraid it has not been as effective as we would have liked it to be. But nevertheless, I think we have used the time in order to reinforce the digital analytics and also fine-tuning the cluster model in order to increase its efficacy, which I do hope that in 2021, in this year, when situations normalize a bit, we should be able to extract a greater return and inefficiencies from this.

Got it. And the second question, while you covered in your presentation at rural and semi urban, you will be looking at expanding distribution. Are there any changes to the product strategy, considering these are the markets which are performing much better than they have done in the past?

Very good question. And yes, I talked about -- the second point I talked about was portfolio. And the portfolio is in terms of tailormaking some products for rural markets wherever relevant. But one of the interesting things that is happening today in rural markets is the traditional belief has always been -- for example, if I had to take a MAGGI Noodles pack. The belief has always been that the real consumer at best will pick up a single pack of MAGGI and then try it. What we have been observing, and this is something that has been through during the pandemic, the demand is for multipack. So therefore, the rural consumer is as much of a medium to any user as his urban counterpart. So as I said, I think convergence of aspirations is happening much faster than we think. And I'm sure you would have observed this across other companies as well, but certainly at Nestlé. We see that convergence of aspiration. That's why the hope on categories like milk and nutrition. That's why the hope in categories like coffee, like indeed on the prepared dishes area and also in the chocolates and confectionary area because consumers are wanting it, asking for it. And it is not alien to their lifestyle or to their cultural roots or to anything.

We have the next question from Mr. Rahul Saraf with Hill Fort Capital.

We've been reading that there's been sort of a change underway at Nestlé Global with an increased focus on nutrition, health and wellness, which has been sort of leading to a much sharper pivot on medical and consumer nutrition and even leading to divestitures of some businesses across geographies. Now is Nestlé India's sort of aggressive push on prepared dishes and confectionery in sync with this changing global focus, even though the CapEx plan suggests that it is. So how should we get conferred that these winds have changed at the global level is not going to have an adverse effect on the India plan, on the India story?

Very, very good question. Look, firstly, let me clarify to you categorically. There is no angle or strategy. There is nothing in what has been articulated by the top management of Nestlé. That says that because I will focus on nutrition, health sciences and nutrition intrinsic products. That I will, therefore, necessarily defocus on the rest of the portfolio. I think the simple question is, yes, wherever there is a strong nutrition pivot, there is a strong pet care pivot, there is a strong coffee pivot. And I dare say, there is a strong food pivot or our prepared dishes pivot. The markets are and within their ambit of responsibilities to go ahead and look at these opportunities. So I would say that considering the fact that we have a fairly strong milk and nutrition business, some of these positive changes or accentuations that are happening globally will definitely help Nestlé India because we will have access to more brands, to more technologies, to more opportunities, to envision some of these products for the Indian context as well. But yes, I think Nestlé is a decentralized operation. I think, I think one of the strengths of the Nestlé organization is this capability of being -- of thinking global and acting local. And I think that strategy will not dramatically change in either or kind of situation. So I think I'm reasonably sanguine about the opportunities that we have identified, and that is completely and supported. And let me add this point that India is seen as a key opportunity and a key market in an Nestlé group. So I think opportunities here and actualization of opportunities here will be taken serious.

We have the next question from the line of Mr. Shirish Pardeshi, Centrum.

I have 2 questions. You did touch upon more focus on the rural part of the business. But when I compare this with industry stalwarts, I think you are under-indexed in terms of rural representation. So therefore, my question is that some years before, used to have about 40% businesses to come from price points staying and less. Is that strategy is not in place, and that's why you're saying that rural was a lot of focus area last 3, 4 years, and now you're focusing on those price points and getting those distribution up and right?

Good to hear you, Shirish. And look, it's a bit like this. The price point is still an important part of our portfolio. But the time, the orientation and these relevance of the brand in rural markets needs to also come before you start putting in a huge amount of infrastructure. So since you remember, Colgate had and I remember Colgate had. Colgate dental cream and Colgate tooth powder had a lot of relevance in rural markets, and that's why Colgate had a very strong rural distribution system. And I should know because I was that was briefly in the company. But as far as Nestlé is concerned, I think our convergence of aspirations has started to happen in the last couple of years. And that is where, for example, the presence of our nutrition portfolio, the presence of our milk portfolio, the presence of our coffee portfolio is more ubiquitous than what it was before. And that is why the whole rationale for ramping up the infrastructure. I do admit that, as a company, my contribution at still at 25-odd-percent is amongst the lower end of the spectrum. But the way I look at it is that if I'm able to ramp it up quickly and the contribution that I get, assuming that rural markets still continue to grow, can be quite salutary to the overall performance of the company.

Okay. Just an observation and extension to the follow-up to what we are saying. We also saw supply chain disruptions significantly hitting us in the second and third quarter. I think you also noticed that our focus was improve the distribution through wholesale in the rural markets using MAGGI platform. And we also observed that in the deep rural markets, MAGGI small packs are not available, but heartening to know that you're saying multipacks are selling. So do you think the supply chain initiatives and the money, which you are trying to deploy now, will significantly take care of our requirements for the rural product and throughput in the rural market?

Let me divide the question up, Shirish. The first is you're talking about the supply chain situation during the pandemic, and I know that there was a lot of comments that were coming around saying that Nestlé was slow off the block, was not able to respond. Let me be upfront of this. There are 3 things that determine whether the company is able to respond to a situation of this kind. Number one, our portfolio. Our portfolio consists of products where the level of good quality, safety and technology is, I dare say, much higher than what it takes to make some simple staple products that indeed the industry is there for. That's number one. Number two, as a consequence of this, the kind of ecosystem that we need to ramp up and that we need to put together during such a serious pandemic is also quite considerable. You will remember that each of these products need multiple raw materials to be aligned together in order to make a product. So that in a pandemic means tremendous efforts in order to make that happen, number two. Number three, as a company, because of the focus on food quality and safety and consistency of our products, the deliberate strategy of the company is to own manufacturer a lot of what it sells. And does not have 50, 100 co-manufacturers across the country because some parts of the -- some companies can afford that in their portfolio because food quality and safety and things like that, for example, my milks and nutrition. I cannot allow somebody there in the corner of the country to be starting to pack my milk and nutrition products. It needs a certain level of sophistication and technology. And that means that it has to be at a larger scale facility. And because of the nature of the kind of lockdowns that were there and because of the restraints, and rightly so, on the way in which we were able to use the manpower at these facilities. There were a disconnection between the surge in demand and between the capability to meet and requite that demand in the marketplace. So it wasn't a sluggishness of sorts. It is the hard reality that we face in terms of portfolio, in terms of complexity and in terms of technology. And these are the reasons why the way in which we could respond was different. Now on the assumption that we will not have these kind of issues. I do hope and pray for the future. The ramping up that we're doing in the rural infrastructure, and also in terms of the route-to-market, is to take care of the availability in access in markets with multiple SKUs. So small pack is one part of it. I told you about multipacks. And if I'm able to get a larger throughput of carrier backs into the rural hinterland, so much the better for me. So for parts, I do hope would be addressed as far as the future of future of Nestlé is concerned.

We have the next question from the line of Mr. Aditya Soman, Goldman Sachs.

My first question is on infant nutrition and baby products. I think would it be fair to say that the overall sort of e-commerce penetration on this category would be higher than some of the other categories? Or that would be a wrong inference? And then related to that, just because you are not allowed to advertise that in traditional media. Does that mean that online influencing can lead to sort of your competitive advantage being somewhat lower, given that all the other brands can also lay the products on e-commerce and get better traction, especially as more and more parents or working mothers look online for advice?

Look, good question, Aditya. I mean, I just want to profess it. Two things are important to us. I talked about breastfeeding and the importance of breastfeeding. Secondly, as a company, we are beholding to the WHO and to the IMS Act in India, which is very, very strict as far as propagation and as far as trying to advertise any of these products. So therefore, that we are very, very strict about, and it's something that I'm very proud of because we kept ourselves absolutely and completely above both. Now these brands are dependent on 2 things: the quality of the nutrition and trust with the health care professionals. For the ones, who might, in case a mother is unable to dress feed recommend such products to the mother. So in e-commerce, clearly, there is a play. I would not say that it is significantly higher than most of the other categories, but there is a play. People do ask for it and people do get it and those in the hinterland, certainly, would like to order it on e-commerce. Now I don't see that as a kind of a detractor for others to come in. I think it's an open market. Everybody takes their --- stakes their claim to the consumer. There Nestlé would never be found -- one thing, Aditya, is in terms of the ethical standards of what we do in order to get the opportunity. I think that is extremely clear. And yes, we can have -- one of the strategies, one of the philosophies that Nestlé is I welcome competition. I respect competition, but I don't see as that. Because if I'm doing something right and I have done this right for 155 years, there's no reason for me to start panicking or to start sweating and do something foolish. So therefore, we will not do a lot of that kind. We are seeing a trend on e-commerce. We are expanding the repertoire of products that are coming out in the milk and nutrition area with encouraging responses. We are a nutrition, health and wellness company. We are a company that can truly call itself a nutrition company because that is the foundation of this company. And that is what we will work towards to the tunes and to the interest of the consumer.

Okay. I understand. Very clear. And just a follow-up, just more short follow-up question. I mean in terms of total SKUs that you'd be looking to sell in rural, so what would be the proportion today of SKUs sold in rural? And what would you look to increase that to, say, by 2024 when you cover 120,000 villages?

Look, today, our rough estimate, maybe 32% to 40% of the SKUs is what would be represented in some form or the other in smaller markets. As I go forward, with a combination of portfolio and customization, I hope that it is more. But the issue is, Aditya, that even the current SKUs that I'm selling, if I am able to make its availability more ubiquitous, if I'm able to make it more relevant to the semi-urban and rural consumer, I think there is enough -- there is headroom there itself. So customization will come after I find that the current SKUs are totally irrelevant. And there's no reason to believe that some of it is irrelevant as far as the rural consumer is concerned. I mean to set an example. We've always said that multipacks will not sell. The only -- the internal belief was that multipack, whoever will [indiscernible] fellow is going buy it, he will buy only a single pack. He's buying multipacks. I mean who are we to make a judgment on whether that consumer there. He's finding it relevant, he's finding it resonate. He's like the ad. He likes the taste. His family and kids love it. And why should he not buy it?

We have the next question from Mr. Rahul Maheshwari, Ambit.

I have 2 questions. First, can you give some insight or color on your Nestlé Health Science division among the nutrition segment, which is there? How big this can be? And what are the plans for the Nestlé, either to make it as equal and big category like a nutrition because it's a -- we are finding the competition very aggressive and the results are coming. So has Nestlé also has the kind of plans to make it a very large segment?

Good question, Rahul. Good question. So health science is clearly an opportunity for the company. I must say that some of the products that are there in Nestlé health science are products that I'm extremely proud of. If you look at our one of our flagship products called Peptamen, which is a post-operative protein source for people undergoing surgeries or serious illnesses. It is the best product that you can get. I mean that's a simple fact that has been conveyed to do by doctors and by surgeons that it is the best post-operative protein source that you can have. And Peptamen today is sold in numerous hospitals. But again, there is an opportunity as we ramp up the business, as we go to smaller towns and then smaller hospitals. And with the increased emphasis on health care as a country, I'm sure we will start seeing the benefits of it. The next big product is Resource High Protein. Resource High Protein is the best protein supplement that you can get on the market. We don't -- don't take my word for it. You see it yourself. The least amount of sugar and a 78% protein. So it's a very, very effective protein supplement that you can get. We have the same product available for diabetics. We have the same product available for people undergoing dialysis, for people undergoing hepatic problems we. Are looking at other products as well. We have just launched a product called OPTIFAST. OPTIFAST is the best obesity controller product that you can have. It's a proven product. Again, this is the product -- these products, Rahul, take some time to to start to resonate in the market because these are sold through doctors. And these are fairly specialized products. They are not -- except for Resource High Protein, these are not the general mainstream chemist or pharmacy-led products. I see, definitely, in a country with, unfortunately, with serious issues on diabetes, serious issues on cardiovascular health and even noncommunicable diseases are the majority of the tests in this country. I see a bright future for Nestlé Health Science. And you will see that we will gradually, but very steadily ramp up the capabilities of this, and this can become a very good opportunity to engage with consumers as they seek better nutrition solutions.

I know that's the dealers itself saying that these few of the products are doing very well. So I appreciated your thoughts, sir. And second, sir, the new categories, which you have highlighted earlier also about the Nestlé breakfast cereals and the beverage solutions and food services, which sits under the Nestlé Professional. Any color how the piece is moving? And what are the plans? And third question, sir, sorry to squeeze it. We had seen the Nestlé was the pioneer to start with the innovation series since 2016 and '17, more than 71 products were launched. Can we see such kind of run rate for next 3 to 5 years also? I'm not about what kind of products, but a qualitative direction would be very helpful.

Look, I think a good question, Rahul. And let me take the first question -- the last question first. I think innovation, renovation will be a centerpiece as far as Nestlé is concerned, so don't ever think in your mind that we have launched these 80 products, and now we're able to go to sleep. Yes. What will happen over a period of time? Like, for example, during the pandemic. Let me be very clear. We focused and invested in the core. So in 2020, the investment was largely on the core and less on the innovations. Why? Because I have to protect the core. When the ship is shaking in the sea, I don't start going after the color of the paint on the mast. I go after the one that is core to the company. So that is something that we will do. But I think going forward, I told you already, 40 to 50 projects are on there, and we will move forward with it. As far as new categories are concerned. I think we had all that beverages, which is milo and breakfast cereal also. I think these, unfortunately, took a bit of a backseat during the pandemic because we were not able to engage and build the kind of activities that we want. But be rest assured, Rahul, this is a long-term company. We don't simply give up because a couple of months has denied us the opportunity. We could be delayed by it, but we will come back to it. On Nestlé Professional, the out-of-home, which really to took a very bad beating to begin with. And now as I told you, is sequentially coming back. I think we used this time to recalibrate ourselves. We had a program called Naiyi Shuruaat, which was a consumer, a customer connect program. It was to help the customers during that period in terms of product, in terms of credit, in terms of deliveries, et cetera, et cetera. So that whatever little business they had, they were able to carry on. This was the time when we also had good innovations. Nestlé has got into roast and ground vending under the Nescafé name, 2 coffees have been introduced. We also were pioneers in touchless vending. During this period, we came out with touchless vending machines, which are now being rolled out. We came out with vending machines where digital pay systems, like pay team and others can be can be utilized. We came into with roasting ground for the machines. So as far as out-of-home is concerned, I think we came out with quite a few food solutions, whether it is in terms of price mixes or whether it is in terms of customized sources, coconut, milk powder, et cetera, et cetera, quite a few initiatives have been pushed through during this period. And I do hope that as things start to stabilize, we will be able to see the results of this. So no idle moment, Rahul, under the watch of all of us. We ensure that we utilize every crisis as an opportunity.

We have the next question from the line of Avi Mehta, Macquarie.

My question was regarding the rural focus, especially on the portfolio side. I just wanted to understand, would you on new launches -- a flavor of what is the portfolio strategy over here? Would it be more in the form of packs that you're looking? Or would you even consider a change in the brand architecture, especially in the milk and nutrition side, to have an economy level or for in that kind of?

Let me -- it's a good question, Avi. Let me put it -- calibrate it in terms of order of priority. The first order of priority would be to look at current portfolio of the company. So before I get into the current portfolio of the company, if I were to have some new categories coming in, it might be a little bit of a cart before the horse. So current focus would be on the current portfolio of the company. And carving out number two, the relevant SKUs in that portfolio as we see relevant, you know that we have a fairly strong consumer insights and market intelligence unit that incidentally reports to me directly. It's part of my management team. It's not part of the marketing group as such. So there is a fewer line of sight as far as what could work and what kind of products would work. We will first use these to seed the market more aggressively as we go forward. There are, of course, products in the angle that could be a more rural-centric in terms of ideas at the moment, which would be coming out in the next stage. So when we find that the current portfolio is making relevance, is creating the resonance that we want is when the renovation part of it in terms of new products would start to kick in. So we would want to play with our current strengths, calibrated SKUs, activation and promotion around these, and then go to the next stage.

We have the next question from Binoy Jariwala, Sunidhi Securities.

First of all, I would like to congratulate the team Nestlé. Over the last 5 years, they have moved up 4 ranks within the Nestlé S.A. global market table. So heartiest congratulations on that. My question is on the CapEx. So we've outlined about INR 2,600 crores of CapEx, which is to be executed over 3 to 4 years. I think the first couple of lines of the noodles are going to be operational in calendar year '21. Could you help me understand the phase-wise operationalization of the entire CapEx plan? Related to this is that over the past 5 years, we went to various new categories, be it breakfast cereals, be it health food drinks under Milo, Nestlé Health Science and also Indian breakfast and premix tea. So in this new CapEx, are we also going to manufacture any of these new categories that we have seeded over the last 5 years?

Thank you, Binoy. Nice to hear you again. And thank you for your very kind words on the company. I think it's the team that deserves it more than anybody else at this stage. I think in terms of CapEx, yes, we announced INR 26 billion, which is a strong number to look at for the next 3 to 4 years. If I were to look at it, really, there are there are 3 categories that really takes the majority of this investment. There is the new factory in Sanand. That is going to augment the MAGGI Noodles capacity initially. There is the coffee investment in Nanjangud, that is also going to going to improve the capability of throughputs and also of new products as far as coffee is concerned. And the third one is in the chocolates and confectionary area, which is the investments in Ponda and in Tahliwal, which is 2 of our confectionary factories. So at this stage, I think the main thrust of the investment within these 3 categories, fundamentally in 4 facilities. So you'd have Ponda, Tahliwal, Nanjangud and Sanand as facilities there, which will attract these investments. At the moment, we are not looking at -- I mean, the -- some of the new products at this stage, we would still look at continuing the sources where they are currently being manufactured. But yes, I think once we see a certain threshold being reached, we could look at further investments coming up at a later stage. But at the moment, I think we are very, very busy, and it's been tough in these pandemic times to execute a new factory, it's not been easy. So the team is really working 24/7, and it's back breaking. So let's do it in stages and take it forward.

Sure. And on a related note, there is -- so there is huge thrust on plant-based foods by our global parent company. Do you think there is an opportunity in India to expand that portfolio and likewise grow the MAGGI franchise?

Good question, Binoy, and as on a lighter note, as you know the poem. [Foreign Language]

Sir, this concludes the question queue.

Thank you. Thank you. Thank you all very much. On behalf of myself, on behalf of David McDaniel, our Finance Director and CFO, on behalf of Sanjay Khajuria, Shashank, Murli and we really, really appreciate the time that you've taken to spend with us. It's been a fairly long time, almost 1.5 hour is what you've spent. So it's a -- I'm really -- I'm deeply grateful for the time you've spent, for the interest and involvement in the company. And I've also -- it also given maybe the opportunity on behalf of myself and the team to share with you our thinking and the journey ahead. So thank you all very much, and have a great weekend and have a great month and year ahead. Thank you.

Thank you so much. We now conclude the session. Thank you for the participation.