Nestlé India Limited (500790) Earnings Call Transcript & Summary

Hello, everyone. Welcome to the Nestle India Full Year Earnings Call. I am Shashank Kumar Nair, Senior Manager, Corporate Communications, Nestlé India. I have with me today, my senior colleagues from the Nestle 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. Except for the historical financial information contained herein, 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 hold only as of the date. The future involves uncertainties and risks that could cause actual results to differ materially from the current views being expressed. Potential uncertainties and risks include, 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, industrial relations and regulatory developments. Significant disruptions in the operations due to unforeseen events, including as a result of the spread of the disease. Volume and mix and organic growth are basis Nestle internal reporting standards. Figures are regrouped, reclassified to make them comparable. Calculations are based on non-rounded figures. Analytical data, our best estimates to facilitate understanding our business and not meant to reconcile reported figures. Answers to questions may be given, this is generally available information in public domain. No person is authorized to give any information or to make any representation not contained in and not consistent with this presentation. And if given or made, such information must be relied upon as having been authorized by or on behalf of Nestle India Limited. [Operator Instructions] As per practice, the entire proceedings are being recorded and will be uploaded on our website, www.nestle.in. I will now request Mr. Narayanan to please take over and make his presentation.

Good morning, good afternoon, good evening, ladies and gentlemen. And a very hearty welcome to this investor call. I hope to keep my comments fairly brief so that we have enough time for your questions and answers. I do hope that all of you are keeping safe, that your families are safe and that everything around you is calming down as we start to come out of this pandemic, which I do hope. The theme for my presentation today to you, the short one that it is, is determined to keep stock. I think we have all been through a lot in business and in our own lives. And I think it's important to reflect on what intrinsic strengths we have as a company to be able to come out of this difficult situation and also to look ahead with some hope and also with a lot of pride at whatever we have achieved over this period of time. One of the key takeaways, the last time that we had met, I believe, on the 29th of October 2021. The key takeaway is at that time were unwavering commitment to India, leveraging the role bun opportunities, striving to continue a robust business model, sustainability across our operations, caring for communities as a way of life and of course, all that we do around our people and really ensuring that we have a more robust and more energizing and a more inspiring work situation. What are the elements of the resilient organization that I would like to touch upon today in my presentation to you. Firstly is to cover the full year '21 results. The quarter 4 '21 results, which is in your hands already. The underlying performance. There is, of course, as you would have noticed, a large exceptional charge that is coming because of reimagining retirement benefits. What are these? And what is it? How does it impact the organization. Digital analytics journey. We're very proud of the journey that we are making. As we become a larger organization, there is every need to ensure that data works for us, that information works for us and that seamless process and decision-making systems, support the ambition and the growth of the organization. And finally, we also celebrate a milestone of sustainability that I would like to take the occasion today to highlight. Our full year 2021 performance, as you know, we followed the January, December calendar. We've hired -- we have closed the sales in December at about INR 146.3 billion, growth of 10.1% in -- over the previous year. The profit from operations has grown by 13.1% or 50 basis points enhancement of the operating margins from 21.7% to 22.2%. Our net profits have grown from 15.7% to 15.9%. In terms of operating growth at 11.5%, though the reported growth is only 3%, and that's because of the exceptional items that I will be coming to shortly. Earnings per share has also moved up handsomely by the same 11.5% from INR 216 per share to INR 241 per share. Of course, the reported number is about INR 19 lower at INR 222 per share. So the underlying fundamentals of the organization continue to be strong and robust. If you look at quarter 4 2021, again, the robust growth continues. Profit from operations have also improved. Our growth -- reported growth -- total sales as 8.4%. Of course, domestic sales is higher at 9.2%. We closed the quarter at 37 -- a little over INR 37 billion. In terms of profit from operations, operating profit, again, the underlying growth has been strong, 14.7%, operating margins improving from 20% to 21.1%. And of course, the net profit also before the exceptional items, moving from 14.1% to 15.2%, which marks a 16.6% growth. However, the reported growth is at minus 20%, and that's because of the onetime exceptional item that has been booked in the profit and loss statement. Earnings per share, we would have closed without any acceptance charge at INR 58 per share, which is up from INR 50 per share, a 16.6% growth. However, because of the exceptional charge that has been taken, it is at minus 20%. The point that I wish to make once again is that the performance for the quarter also has been fairly robust and gives us some confidence about the future as well. I talk here about 5-year performances. It's good to talk about 2 quarters and 3 quarters and 4 quarters. But as the CEO of this company, I would like to put forward the 5-year or the 6-year performance, in fact, in terms of what we have achieved. And boring as it might sound to be steady and to a certain extent, to be having steady hands on the wheel is probably a virtue at this time. So if you look at from 2016 to 2021, the growth has been led by volume and mix. That has been the cornerstone of our growth. We talked about it when I came to head Nestle India in 2015, one of the first statements that we made was we will have penetration-led volume growth to be the driver of growth. That's what we have continued for the last 6 years from 12.5% now to 9.6% is the volume and mix-led growth, which arguably, and I don't boast about it, would be one of the better numbers as far as the industry is concerned. If you look at the recent past, which is the last 4 quarters, again, it has been fairly salutary. Last quarter, we closed at about 8% growth volume and mix which will also be somewhere in the top end of the spectrum of performances in the FMCG sector. CAGR terms, 2016 to 2021 is 10.5%. If you look at value growth, Again, it has been a steady performance from 2016 to 2021. 2021 closed at 10.7%; total sales, 10.1%; domestic sales at 10.7%. And if you look at the last 4 quarters as well, the sales have been salutary. We closed quarter 4 of 2021, at 9.2%. In CAGR terms at 10.4%. Hence, it is fair to say that penetration-led volume growth has been the defining element of the performance of Nestle India in the last 5 to 6 years. Where does the growth come from? Because you would say you've got this growth, but where is the growth coming from. Mega cities has been growing consistently for us. It took a dip in 2020. You will see those numbers in brackets and that is because of the COVID situation, the mega cities, which is those cities which are greater than 4 million population were adversely affected. If you look at metros, they continue to be strong, and they've had growth that also has been indicative in some sense, synonymous with the reducing impact of the pandemic, again, at 6.3% growth to look at the last quarter. If you look at Town Class 1, this is the exciting part of India that really defines our urban strategy. Town Class 1, again, has been encouraging growth. If you look at Town Class 2-6 has actually been double-digit growth. And you can see that 12.3%, 17%, 16.6%, 13.7%. So fairly strong growth that have come. Now we are arguably a low intensity as far as rural sales is concerned, getting about 20% to 25% of our sales coming from rural markets. And yet the villages actually have grown for us. And we have closed quarter 4 at about 9% growth following upon a 10% growth. So some of the characteristics has been that this has been a secular growth across town classes and of course, in terms of intensity of growth skewed towards smaller towns and skewed towards the rural markets that really tells us that the Nestle portfolio has come to stay and has started making the inroads into the markets of the future. Profit from operations, how are we done here? Again, I'm giving here the chart for the last 6 years. 17.6% is what we closed in 2016. It's almost up by 460 basis points to 22.2% in 2021. If you look at the recent past performance, we had an exceptional high end in quarter 1 of 2021 at 23.3%, closed last quarter at 21.1%, a CAGR of 16% in terms of operating profit growth. If you look at net profit growth, the CAGR has been 25%. And there again, it has improved from about 10.6% on a point-to-point comparison from 2016, would have closed at 15.9%. Of course, the reported is 14.7%. So therefore, this again has been a good journey for us. almost by about 500 basis points -- 530 basis points. Last 4 quarters, again, has been reasonably strong, 16.7%, 15.6%, 16%, 15.2%, reported 10.4%, and that's because of the exceptional item that we had under the transition cost of the pension plan. Again, the CAGR here has been a strong 25%. So strong volume-led growth, strong evolution of operating profits, strong evolution of net profits. If you look at the domestic sales for last year, we had milks and nutrition. That's about 42% of the portfolio growing at 2.6%, I hasten to that we had a very high base effect in 2020. That also has impacted and, to a certain extent, the milks portfolio was also impacted by the competitive pressures. The nutrition portfolio, however, has started to make events coming out of the pandemic, and in fact, recording quite encouraging growth. The prepared dish and -- dishes and cooking aids has grown extremely well at 16.7%. The confectionery business has also grown extremely well at 20.4%, and the powdered and liquid beverages, which is the coffee business has also grown by 16.1%. So you can see that the categories that need to start to fire all cylinders has started to fire all cylinders. And I think that is an important part that you need to notice about the overall portfolio of the company, that it is not unidimensional in terms of growth, it is now becoming more multidimensional in terms of growth. If you look at innovation, innovation continues to be a priority for the company from 1.5% of sales coming in 2016, we kept innovation as these -- the center of plate as far as the initiatives of the company were concerned. Happy to see that we closed at close to 5%. 20 new projects in the pipeline, 100 new projects, new products launched in the last 5 years and new categories are also being considered at the time that I'm speaking to you. All this has created significant value for investors in terms of annualized returns in the last 20 years, an annualized return of 19.8%, almost 20%, a company that had a market capitalization of a little over $1 billion in 2001, today is almost at INR 2 trillion and about $25 billion in terms of the overall market capitalization. You can see that we are up 38.2x versus the FMCG benchmarking tax of 14.7x. This gives us a lot of pride, ladies and gentlemen, but it also gives us a lot of humility to be able to be on this beam of high performance as we go forward. What are some of the storm clouds that are appearing and, I'm putting this upfront here, storm clouds on the horizon, global commodity prices, I've tracked here 13 commodities. Out of these 13 commodities, 6 commodities are hitting 10 year highs. Not 1 year or 2 year but 10 year highs. And I think that is -- food inflation is, I think, a matter of concern. It is something that we have to watch out. Of course, as a company, we have got the necessary competencies. We've got the ability to be able to manage this as best as we can. Nevertheless, it is important to note that food inflation and commodity inflation is here to stay for a while at least. This is a quick section on the impact of our results, which is really the exceptional charge that has been taken, which is really reimagining our retirement benefits. As you know, one of the purposes of working in the Nestle organization, apart from of course a professional environment and an ethical environment and a sustainable environment is the fact that our employees enjoy pension as well after the retirement. What are some of the changes that have been done. We call it the future-ready plan. The earlier pension plan was a defined benefit pension plan, was unfunded. There was no portability. And finally, there was -- the pension eligibility was only at retirement. What have we done today? We are aligned to market practice, and it is fully funded. A combination of frozen defined benefits for past services and defined contribution for future services. So those who are existing in the services of the company will have their defined benefits frozen till 1st December, and then after that, they will move to the refined contribution or the national pension plan that's key as far as their pensions are concerned. What does it mean for employees between security, fully funded plan, managed by financial experts. Please remember, ladies and gentlemen, Nestle is a brand marketing company. We are not the best guys as far as managing funds or managing our treasury operations as optimally and as good as some of the pension companies and other insurance companies are capable of. Portability. It's fully portable, benefits, irrespective of age and service and flexibility. There's a choice of annuity products, basis the financial needs of the employee at retirement. What is in it for the investors? Firstly, it is derisking our profit and loss, embedded risk of a defined benefit plan has been mitigated, bringing future cost certainty as far as the organization is concerned. And of course, this will have a favorable impact in the future on the operating performance of the company as well. And finally, in terms of financial impact, approximately 2/3 of the defined benefit pension liability has been covered. A onetime exceptional cost of INR 2.4 billion has been factored in into the results and, therefore, the EPS that you saw lower by INR 18 was that onetime cost and investment of INR 13.7 billion covering the obligation under the plan. I want to mention that the company has had very strong cash flow generation during 2021. The 2021 cash generation has really gone towards paying our dividends and the carryforward of last year has gone towards the investment in the insurance organization as far as the future liabilities are concerned and also in funding the strong CapEx program that we have got. Bottom line, the company has not gone and accessed any financial institution for any loans or does not have any other risk that is associated with heightened interest costs over a period of time. That's really to answer or to take -- to [indiscernible] you that the fact is that there is a onetime cost that has been factored in, and that's the cost that you're seeing as far as the results of the company are concerned. What are some of the initiatives as far as transforming ourselves with digital and analytics. This is something that we are very proud of. Our digital spends today are anywhere upwards of 30%. In some brands, it is closer to 50%, 60%. That is digital India for you. [indiscernible] is a multi-intelligent data analytics system that we have now put together that is really data fit analytics led and future ready as far as business interventions are concerned. The 3 platforms for this enterprise-wide data warehouse, so data is the new oil, as I say, and this data is starting from retailer segmentation to dynamic forecast. In fact, our salespeople are today being able to carry on their handhelds, auto recommendations to the retailer on what they need to buy. This is the kind of offtakes that they have been able to enjoy. That's a facility that we're building into our operating systems. In terms of cockpit for business management, whether it is brand review, whether it is channel and e-commerce or whether it is growth planning, there is a more robust platform for this, not anecdotal, but data led. And finally, advanced analytical models both for integrating sales planning, for integrating supply chain and value chain analysis and value chain planning and of course, demand forecasting. So the ideal situation is that when there is a seamless impact of offtakes that is measured in the marketplace into production planning and into supply chain over a period of time. This is the journey that we are on, and we are making some encouraging progress in this direction. In terms of granular clusters, we talked about it some time back. How are we doing this? Harnessing granular data links, I think today, we have a fair amount of data that is available both from internal and external, looking at 6,260 urban towns, 555 village level data. Big data analytics involves 5 key KPIs or measures as far as consumer behavior is concerned, income consumption, savings, investment, infrastructure and media exposure. We've got indices that chart out the country bases this. And finally, mapping all of this in terms of potential of geo-targeted clusters. What does this do? This helps us in what we call market mix modeling. This is a jumble. We don't know what the elements of what our sales performance translates into. But if you were to look at the 9 -- 8 or 9 vectors, you are able to disaggregate it using the power of data and analytics between, for example, trade-led digital pay, digital learn, digital own television, PR, outdoor formats, print and the base level sales. So you can disaggregate each of the vectors that impact sales in a geography, in a cluster, in a channel and in a brand. So that translates into a greater optimality as far as the media investments are concerned, in terms of better leveraging of trade assets, building long-term equity, augmenting portfolio strategy, et cetera. So all of this is significantly helping the organization to be sharper, smarter, more focused and more efficient as far as utilization of the resources for promoting the sales and promoting the geographies are concerned. We also embarked on the fact that Nestle of the future is not going to be a company of just brands, but also providing services to consumers. So the service arm of the company is also flexing itself and Ask Nestle is one of it. It brings alive the Nestle corporate trust credentials where our service ecosystem for individuals and for families. In 2021, Ask Nestle attracted about 4.8 million visitors. It is authentic. It is relevant. It's applicable tools and trackers and regional content has been put in on recipes, on expert advice, on custom meal plans, on tracking growth. All of this is to help people with the values of nutrition, with the values of expert advice and with the values of the voice of science rather than depending on any other source as far as their nutrition information is concerned. And finally, of course, building positive inclination towards brands and a stronger business connect with focus on first-party data cookie-less future. I think we are all looking forward to a time when we will have a cookie-less future and really building up the strong foundations of information on first-party data is one of the key strategic responses in the digital space as far as Nestle is concerned, Ask Nestle is just the beginning of this particular journey. For our sustainability journey. I want to take this occasion. I think we have had the occasion last time to be talking extensively about our sustainability journey. Today, it is to really focus on 10 years of the Nescafe plan. This is our Nescafe plan headquarters at Kushalnagar. This is in Karnataka. It's a live demo farm that we operate. Farmers to really look at the livelihoods of coffee farmers, building a community and building a farming community across the value chain and of course, sustainable management of landscapes linked to our value chain is a key deliverable in this improving livelihoods through better varieties through yield improvement, responsible sourcing, traceability and transparency, sustainability and finally, of course, the environmental impact in terms of various scientific measures in order to contain water usage and also to look at soil testing and optimal conditions for growing and also the plant requirements and protecting the site. What are some of the initiatives? The 2 ends are the launch of the Nescafé plan mark the beginning of a stronger sustainability journey. What is the outcome? The outcome is pouring respect for people and the planet into your cup. That's the quality coffee that comes from the Nescafé plan. What does this meant? This is meant dealing with 3 states, 4,400 farmers, almost 30% of our coffee is sourced sustainably. In terms of yields, 18% improvement in yield has taken place; a 23% savings of water on the farms; 2,500 soil samples tested over a period of time in 251 villages. What's more important is that when people and farmers put in the extra effort to grow sustainable coffee, we pay them for it. So the coffee that you drink is made from coffee from which we pay INR 3.5 per kilo extra for part of the coffee source, which is 30-plus percent and almost 7,000 tonnes of sustainable coffee was purchased by us last year. So this becomes a virtuous circle that we look at. Good manufacturing, good growing practices, better sustainability, better rewards, better incomes leading to better farming practices to be done over a period of time. This gives us inspiration to look at other crops as well where we will be looking at these kind of initiatives. So in substance, I've covered for you the performance of the company. The operating context of the company continues to be strong. The portfolio continues to be strong. As far as the charges that have appeared as far as the P&L for this -- for the last quarter is concerned, I've explained to you the transitions that have been made for the right reasons, as far as the pension plan of the company is concerned and I've given you a flavor of the kind of data, digital analytics opportunity and excitement that the company has built in. And finally, I've talked about the sustainability journey and an example of what we've been able to achieve during this period of time. So what are some of the key takeaways this time that I would like to give you with. Number one, sustainable volume led growth. I think this is a mantra that we are not going to let go off in a hurry despite the environment in which we live in. Strong value growth across rural and urban India. We are excited by what we are seeing in rural India, and we are also looking at accelerating the journey as we move forward. Sustainable performance. This is really not just a hope and an aspiration, but I believe, ladies and gentlemen, a demonstrable performance of the company. Our innovation continues to be an engine of growth. I think the fact of the matter is, in the last 2 years, our focus has been to try and focus on the core to make the core happen for us. because I think it's important to see that the core portfolio of the company does not delay during very difficult volatility and difficult periods of operation. At the same time, the projects are already and many of the projects are on the anvil of -- coming up in the next couple of months. Implemented the future-ready plans for our people. That's what we talked about. Strong commitment to transform using data and analytics. I think that's something that's important. Sustainable initiatives at the core of being a force for good. And finally, of course, that while we do see that there is an impact of inflation at this moment of time, and that is something that is probably going to last for a while, yet the prospects for growth continue to be healthy. So I thank you all for your patience. I thank you all for your attention. I thank you all for your support. I thank you all for your understanding. Stay safe, and I look forward to your questions. This is my team, which is really determined in adversity and inspired to grow. The picture you see is our -- of our factory in Sanand. The factory that is a newest factory, the ninth factory, about 62% women, the most digitally connected factory, the most ecologically friendly factory and the future face of Nestle. Thank you very much.

Thank you. Thank you very much, Mr. Narayanan. We are now assembling the question queue. First in queue is Abneesh.

I have 2 quick questions. My first question is on the Maggi noodles and the prepared dishes. In Maggi noodles, you mentioned that strong growth momentum sustained due to increased availability. Could you elaborate on both? Why I'm asking this is, it's a fairly well patted category. There have been new players like Saffola noodles. And is winning in many India helping versus pre COVID give some sense on the market share in the noodles?

Very good question, Abneesh. And as always, you asked the question and you also give part of the answer. So that's the beauty of your question. Yes, indeed, some of it has been really the granular India that we are looking at. I think this is paying off for us significantly. The availability part, I think the opening of our ninth factory in Sanand -- that has been clearly some of the availability-related issues there have got eased out a bit. I would not say entirely eased up, but eased out a bit. And I must say that there is remarkable resilience as far as the brand itself is concerned. So I respect competition, but I don't fear competition. I think we know what we need to do, and we will do what we have to do, but I think the respect and regard and the equity for the brand continues to be very strong. We are at about 60% odd market share that we talked about. We have made progress, and we will make -- we'll continue to make good progress in this category going forward.

Sure. One small follow-up there. So in Maggi, the brand extensions you have done in the last 5 years, could you call out some of the successes you have seen here the last 5 years?

Well, I think the biggest success for us we have a variants of MAGGI, for example, that have done very well MAGGI atta Noodles. We've just launched MAGGI Veg Masala in the South, that's also got off to a great start. Masala-ae-Magic has actually been a very, very powerful brand, very, very powerful brand. And I think it's doing very well. During the 2 years of the pandemic, it actually picked up significantly. And there are more. I mean if you look at -- we look at new categories also within MAGGI that we are coming up with, Abneesh. But the point that I would wish to make taking your question on board is that when I first came, Nestle India was known to be a MAGGI company. Today, I'm happy to say that there are multiple engines of growth. It's not just 1 brand. Yes, the brand is important. I'm not saying for a moment that MAGGI is not important. But there are multiple vectors of growth actually making the journey more exciting as far as we are concerned.

Sure. Last question. So in milk nutrition, you called out that slower growth in milk was because of competition. Could you elaborate on that?

Look, I think the fact of the matter is both operating environment also, a lot of our milk products sell in parts of the country, which have been especially COVID-impacted. Like, for example, in the Northeast, there has been a significant impact of COVID there that has led to a lot of operational constraints. I'm not saying that it has been easy working in those. And of course, I think the fact of the matter is that our competitive pressures in terms of the capability or the profitability of our competitors to also look at price changes, depending on the increase in commodity costs is different, and therefore, that also puts pressure as far as we are concerned.

Thank you, Abneesh. We have the next question from Krishnan. Okay, I think Krishnan is having some connectivity issues. We'll go to the next one queue, which is Shirish.

However, I was a little [indiscernible] was 9.6% and value growth was 10.7%, so it's truly a volume-led growth, which I really appreciate. But tell me how are you managing? And I mean the whole industry is -- there is inflation, which is there. So what is the secret sauce you have been managing? And does that mean that even '22, we will see a volume-led growth and company will take a marginal price increase?

Look, Shirish, you know very well that my task here is not to be giving you forward guidance. So therefore, I shall not comment on how much of growth we will do. I think one of the advantages, Shirish, that we are seeing is, I think our portfolio helps. And I think that portfolio is what is helping us. We've also had some very strong programs so far in terms of cost mitigation. Shark, as we have called it, has also given us good economies. But going forward, I think we will have to look at judiciously price changes wherever it is called upon to do so. I don't think we can be completely oblivious to it. But the philosophy at Nestle has always been that price increases and price changes come last in the queue. And really, for me, the word pricing power is a word I do not quite like. It is consumer power that is important. It is not pricing power that is important. So I like to exercise whatever we need to do on pricing as the last option that we have as a company because what for us is the big challenge, Shirish, and you know this well, is that most of our categories are relatively lower penetrated. I'm not like a bar of soap or I'm not like a biscuit that is there in almost every household. I still got a lot of runway to cover. And therefore, I think we will do this judicious picks between pricing, between portfolio management and between cost and cost efficiency initiatives to be able to keep you happy, to keep the consumer happy and to keep ourselves happy.

Just a quick follow-up, Suresh. You did mention Shark last time. So would you be able to quantify as a percentage of net sales, what kind of savings we would have done in FY '20 or mid-'21?

It's about between 1% and 1.5% of sales.

Okay. Wonderful. My next question is on high science, and you always have spoken when we met you physically about 2 years before, and even you have been saying. But I have not seen any comment during this presentation on high science. So I more look at -- this is a new age product, and this is penetrating very fast even in the price premium that we are charging is also accepted by the consumer. So tell me what is the growth which you have seen last, say, 4 to 5 quarters since the time we have got into this?

You mean -- you're talking about the health science portfolio?

Yes.

Yes. No, the Health since portfolio is relatively small, Shirish. I think -- but it's a very promising portfolio. I think we have got a couple of products that are lined up. We are probably arguably the best product for obesity called Optifast that got off to a great start. Unfortunately, because of the pandemic, it's got affected because nutritionists and bariatric surgeons have not been able to get their hands on the product and either on the people who they can help. That's a product. Our Resource High Protein is one of -- is probably, I would call it, arguably the best protein supplement. It's available for people with normal protein supplementation, for diabetics, for people with hepatic or liver-related situation, for those with dialysis. I think this is a promising part of the portfolio and we will dial up. And as you know, globally, Shirish, I think Nestle is very actively buying into health science and into nutrition science companies, some of which will also benefit us in the future.

Suresh, my last question on the distribution front. You did -- you were saying that 25% business is coming from rural. And you also shown in the presentation that we have about 555,000 villages. At this point of time, if you can tell me over CY 2021, what is the kind of growth in terms of distribution, in terms of coverage and village coverage is gone.

Look, I think good question, Shirish. At the moment, let me be very clear, I'm not targeting 555,000 villages. That's the universe. We are targeting, as I mentioned the last time to you, 120,000 villages, which is villages over a population of 2,000. And therein, we have covered, I think, about 75,000 to 80,000 villages. There is still about 40,000 villages still left. But the results have been very encouraging. The results are very encouraging. I think to get an 8%, 9% volume growth at this time in rural India says that the portfolio must be working. Otherwise, why would consumers be interested in picking up the portfolio. So that's what gives me the encouragement and gives the company also the encouragement because remember that this is -- you and I have worked for a strong distribution companies. So we know it the distribution is very easy to put on paper very difficult to create. And I think that's the process of creation that you're doing.

We have our next question from Shilpa.

Yes. Mr. Suresh, I hope all is well on your end. My first question is I wanted to get a sense of the demand environment because a lot of the other FMCG majors are also flat slowing growth, especially in rural areas. And this is especially on the back of inflation. I want to understand from your front, how have you seen this environment, especially, I mean, has there been any impact of third wave and because of inflation? What's the kind of impact that you're seeing, especially in rural areas because you did mention that the rural growth was quite healthy, but are you not seeing any signs of a slowdown because of inflation in the past couple of quarters?

Look, I think I want to be clear. It is not that everything is absolutely sunshine as far as the economics concepts is concerned. I think the loss of jobs, the kind of pressure on incomes, the seeking of value, all of these continue. So therefore, there's nothing there that has dramatically changed. I think every portfolio plays to a certain genre of consumers and a certain kind of penetration and the certain kind of stickiness as far as the consumer profile is concerned. I think the Nestle portfolio, I mean, this is not to take away from the pain that is being felt by a lot of industry players. It is not -- at the moment, I have not seen any huge weakness that is appearing. Consumers continue to be seeking value, seeking good quality, seeking trustworthy brands, seeking nutrition, seeking credibility. All of this is enshrined in the Nestle model. So therefore, as far as we are concerned, I think we see a certain element of stability. But yes, if food inflation really continues for a long time and is exacerbated by what happens geopolitically, then it can be a cause for concern. But at the moment, as our results are showing, the pressure points are being felt, but it's not that the house is collapsing.

And in fact, inflation was my next question. You did say food inflation was a concern and some of the commodities at 10-year highs. Did you affect any price increases in the past quarter? I wanted to understand on that front.

Yes, we have done -- selectively, price increases have been taken. But as I mentioned earlier to the question that was asked of me. I think we put price increase at the last that we need to do. So we look at efficiencies, we look at strategic buying, we look at Shark, we look at portfolio and capacity optimization. And then we come to issues of pricing. But yes, price increases have been taken. And as I mentioned earlier, that, that could also be a lever that we need to press in the future if indeed, the level of inflation is [ unrelented ].

My last question is that you did say there's a lot happening on the innovation front and new categories are being considered. Now while I understand you cannot give me any specifics, I wanted to understand the areas that you're looking at that look promising for Nestle in terms of innovation?

Across the portfolio of the company, Shilpa. Honestly, it's across the portfolio of the company, whether it is in nutrition, whether it is mix, whether it is in the prepared dishes portfolio, in the coffee portfolio, I think there are a number in -- some of them in the health sciences portfolio of the company. So there are a whole variety of projects that are on. And I think -- these are but when and how we launch them, we'll always be dependent. The first right on resources will always be to the core of the company. I mean, the core has to be secure. There's no point in me building an outhouse when the living room is collapsing. So I think that's the philosophy that we use that we will protect the living room. We will protect the core of the house. And then we will selectively keep adding. The issue for us, Shilpa, I don't say this with arrogance. At Nestle, the question is not what to launch, but when to launch. We don't have a shortage of ideas. The question is when do we want to launch whatever we want to launch.

Right. But also, I mean, globally, also Nestle has been falling into a bunch of new categories. Will some of that also reflect in the domestic market?

No, sure. I think the fact of the matter is, is that we enjoy a huge amount of support from the parent in terms of technology, in terms of R&D, in terms of brands, in terms of operating efficiencies, et cetera, et cetera. I mean we have an umbilical cord that is extremely strong. And therefore, it is clear that whatever benefits accrue to the global portfolio. Some of it as is relevant would flow down to us as well.

Next in queue is Percy, along with his colleague, Samir.

Last time, Percy had a problem. I hope this time he doesn't.

It seems he's having a connectivity issue again, sir. That's why he had his colleague also on the call. But in the interest of time, apologies Percy, you'll have to circle back. Since we are already out of time, what we'll try and do is accommodate 2 more questions, sir. First from Avi and next from Vishwa. For the others whose questions we've not been able to answer on the call, feel free to e-mail it to us and whatever we can share...

I don't mind if you want to continue for 15 minutes more till 5:00 p.m., it's fine. We will do that.

Perfect, sir. Perfect. Let's do that. So let's try and take as many questions as possible. Avi, over to you next.

Am I audible?

Very much.

Just had 2 questions. First was a basic follow-up on the gross margin. Is it fair to say that the sequential increase in gross margin that we saw is largely driven by a better category mix? Because if I kind of look at the math, it does suggest that there has not been a material change in either mix or realization versus what we saw in the third quarter. And just a follow-up on that. If that is the case, then just trying to build it up, would it not be fair to say that while you're concerned about input cost inflation, it's not as current kind of concern, it's something that could play out, which is what we are seeing. The cloud is what we are seeing, not essentially playing out. So those are the comments.

So me take the second question, and I will give the first question of yours to my able Finance Director to be able to give you a more better answer. So as far as the food inflation is concerned, let me mention that it is here and now. This is not a futuristic kind of statement that we're talking about. Between December quarter and now, we are seeing a distinct storm clouds and in fact, the storm is upon us. So it's not a hypothetical. Let me look at it 3 quarters from now kind of situation and give you an idea. So this is what we are facing today, and this is what my team and I are trying to see, mitigate as best as we can. So that is on the part of food inflation. The first part on the sequential margin change, David, you might like to answer that question.

Sure. Thank you, Suresh and thank you for the question. If we look back at the last 4 quarters, we have seen our gross margin dropping a little bit quarter-by-quarter as input cost inflation has been coming higher and higher. We've been managing this much as we have for the last several years with the volume growth and the scale benefit this brings to our P&L through judicious control of all of our cost heads and careful timing and calibration of marketing investments, for example. And latterly, some pricing, as Suresh has said, more as the last choice, last weapon of choice. But it's true to say that more pricing has been needed as we have moved through the year as the input cost inflation has steadily ramped up. And as Suresh says, this picture is continuing to evolve in the same manner.

Okay. Just one thing. Can you give us a number of the inflation on a basket level? Is it possible to share that how much is it from December to date?

I can. I can tell you that our index of commodity costs is up in high single digits, let's say, over the last 6 to 9 months.

Perfect. Just the last bit is on the pension plan change. Would it be fair to look at this resulting in a lower hit to the P&L on the employee cost front from a future perspective. And is there for the remaining 1/3, which needs to be covered, would there be an additional investment that would be required?

Both questions, the answer is yes. There will be a marginal improvement in operating margins through a lowered employee cost. So if you like, the pension service cost is now national pension scheme cost. But the key element here has been derisking and removing the possibility of the liability growing with demographic factors and the actuarial valuation and providing employees with flexibility, portability and more professional management for their pension. So it's been a win-win, and that's been evidenced, I think, by the extremely smooth transition we've had of this project. So yes, a marginal improvement going forward. And when or if we come to address the remaining employees, it would be fair to say that it's likely there will be a onetime transition cost again. That could be in a proportionate manner to that, that we've seen for the first wave.

We have our next question from Vishwa.

This is regarding child nutrition from age 2 to 7 years old. If you see our portfolio like Lactogrow and NANGROW versus competition versus Pediasure. Like we may not be the leaders, but how we are dealing with it, like Resource versus Ensure. And [ Nesplays or crunch ] versus Kellogs. And in terms of competition, how we are dealing and how we are trying to improve the market share. And second, the availability of the product set chemists or hospitals are availability across India? How relatively with our mass products, how we are faring there?

Your question, Vishwa. I think the signs on the 2 to 7, what we call the toddler range has been extremely encouraging. I think mothers realized the quality of good nutrition, of credible nutrition of demonstrated performance, and I think that is playing out quite well for us versus any of the other players in the market. Similarly, as far as Resource High Protein is concerned, yes, Ensure is much larger, but I think we have a product that's also, technically, a very good product with the least amount of sugar and the highest amount of whey protein. So therefore, there is a positive in that as well. And also, I think, let's be very clear, the [ Becker's ] cereal business is here to stay. So -- and Nestle has always been a long-term oriented company. MAGGI wasn't built in a day, and neither was Nescafe, neither is KitKat. These all take time. The company has got the stomach, it has got the courage, it has got the wherewithal to stay the course and to make it happen 1 day. And I think that is something that we will not -- we will not stop at. So therefore, all these categories have got off to relative levels of encouraging starts. And I think we will continue on this journey as we move forward in the coming years as well.

Sir, just to add, in terms of availability, like are we covering all chemists across India?

Yes. What we do is we have got a fairly strong pharmacy presence. So for example, for the toddler range, there is a strong pharmacy presence that is taking place. As far as the other 2 categories are concerned, we are doing it more selectively, Vishwa, because one of the risks is that these are relatively higher value products. We have to be careful. Otherwise, we will have to keep taking back products in large quantities. So we are more judicious. We are more careful in our distribution strategy. Also, we are putting a lot of weight on e-commerce as being a carrier for this. And indeed, during the pandemic, e-commerce has helped us open up the Tier 2 and Tier 3 tubs, which otherwise had to be done with physical distribution. So we have a playing to the strength of the category and playing to the strength of the geography and channel as well.

Got it, sir. Sir, next 2 more questions, sir. If you see traditionally, 80% of our portfolio comes traditionally or 15 modern 5% e-commerce, if I put it that way, as if you say 10 years or 5 years down the line, if modern trade each up to 50% or so, if I presume. And compared to traditionally modern trade, they have private labels, and they may have the pricing power to charge more commission on the selected products. So how do you see this end, if not now, immediately like in future, if modern single applicable to e-commerce. So how the strength of [ biases ], monopolies under well pricing power? I mean, they may -- how you would see this challenge?

Look, I think we saw the fact of the matter is that as a company, we respect brands. We respect competition. We respect our customers because many of these are people who are referring to our customers. But this company has built 155 years because of integrity, trustworthiness and quality as far as our brands are concerned. And I think that is something that we are not going to walk away from. So long as our brands remain credible, remain trustworthy, remain honest of the highest quality and of the best value deliveries to consumers. Consumers will stick with us. That is the belief of the company that has made Nestle into the largest food company and the largest FMCG of sorts in the world. And I think this is the philosophy that will make us continue on this journey.

Got it, sir, got it. Sir, regarding third question, final question. Regarding the B2C presently...

I'm sorry to interrupt..

Last question...

Vishwa, you can actually reach out to us and share that question because there are so many others in queue, and we have to be fair to everyone, I'm so sorry. Thank you for understanding, Vishwa. Harit, you are next, if you can please proceed.

I just had 2 quick questions. First was on the rural side. So it seems like from all quarters, we're hearing that there are challenges on rural demand. How do you think of the next 6 to 12 months in terms of your rural distribution strategy? Is the idea now to consolidate and wait till you see a pickup there? And then kind of push forward again on the village side? Or I just wanted to hear it because there is a cost benefit that you'll be doing on this side, given what's happening.

Yes. No, Harit, I think, look, we are not sitting on hope. We have demonstrated performance. You saw the rural, the village numbers, 9%, 8%, 10%. So therefore, it's not that we are sitting on hope. So therefore, we will go pragmatically, but we will go strongly on enhancing our semi-urban and rural distribution, no 2 ways about it. And yes, with the benefit of the portfolio, we hope to get better growth. And yes, we have a lower play in rural markets. And therefore, I think some companies feel the pain a hell a lot more as compared to us. I do admit it, but even on the base that we are in 20%, 25%, we are still getting the growth. And I do hope that this continues with the judicious management of the portfolio and of the right SKUs in the rural markets.

Got it. And the second one was on the innovation strategy. So again, in the wake of a slightly slower demand environment and the commodity inflation moving up, which means you have probably lesser budgets to invest on noncore as you call it. Again, is there a thought process that the products are ready, but maybe you might have to wait it out a little bit before you kind of put it out in the market?

I think the best analogy is just what I gave when the bidding room is collapsing, you don't build an outhouse. So we will -- we'll ensure that our living room remains secure.

Mr. Narayanan, we will take 2 more questions, one from Arnab and another for [indiscernible]. For the others in queue, sincere apologies. But feel free to reach out to me if you need any clarifications, and we'll help out. Arnab, please proceed.

Just 2 quick questions. One is that your overall growth is quite strong in all categories, but milk and nutrition still remains [indiscernible]. Do you see this last 2 years as more of a cyclical challenge due to COVID and other factors? And therefore, you could unlock the growth here or [indiscernible] actually here where the growth will be a little lower? That was the first question. Second, I just wanted to ask on the PLI scheme, if you could quantify what percentage of the turnover potentially could benefit from that? And any kind of...

Thank you, Arnab. I lost your voice in the middle. I think as far as the PLI scheme is concerned. I think we have been one of the beneficiaries in the fruits and vegetables category. I think it is -- we are quite happy with participating in it. It demands for certain investment over the coming quarter -- coming 3 to 4 years, which we are willing to commit to. I think it plays to our strength as well. And that will be, I think, an important aspect of our initiative and also the leveraging of manufacturing that we will do over a period of time. And just to jog my memory on your first question, it was on?

The milk and nutrition, the growth has remained a bit anemic, were there cyclical factors? Or do you think there are some structural issues why this category would continue to be a little slower?

Let me make it very clear that milks and nutrition is the core strength of this company. So in as much as you might get swayed by 1 year of either extraordinary growth or maybe muted growth. For us, it is a play of our strength. And you will see this playing out. I mean if you look at the last quarter, the quarter 4 results, for example, for milks and nutrition, it has been quite strong. So -- the full year is at 2.6%. The quarter 4 is that, I believe, 7.6%, 7.7%. So it's been fairly strong. So it's not that the portfolio itself is anemic. Yes, there are base effects. Yes, there are purchase patterns and buying patterns that have been somewhat warped because of the pandemic, that will get itself adjusted. But overall, I think we have a great degree of confidence in this portfolio. And you will see traction happening.

[indiscernible], go ahead, please.

My question relates to the impact of inflation, which you mentioned that's going to be there for a while and also right now, you're in the middle of this inflation. So how is the company trying to mitigate it keeping in mind the half, how long it's going to last in the [ center ]? Do you see that maybe in the next 2, 3 quarters? Or do you see that going away in the next 1 quarter or something like that? That's number one question. And second is on the rural part. You did mention that because you have a lesser penetration there compared to other bigger players. But how do you see the -- [indiscernible] outlays of the programs like government programs like MG and [indiscernible] being reduced and that impacting the purchasing power of the people are there. And subsequently on the growth in the overall [indiscernible] growth in the country.

Look, I think -- thank you, [indiscernible]. I hope you're keeping well. Look, as far as the outlook on rural growth is concerned. I think in as much as it can be said that there is pain in rural markets that is being reflected by many players. What we can say is that, I guess, as -- probably as a result of the urban to rural migration that we have seen that happened a couple of quarters ago, there has been, therefore, a seeding of brands that has taken place in some of the semi-urban and rural markets that is benefiting Nestlé. As we go forward, I think as of now, we have not seen a dramatic kind of shift or change as far as the progress of our brands is concerned. But of course, this will depend on the enormity and acuity of the economic pain that will be felt or not be felt as we go forward. So I think I would really not like to make any doomsday scenario as far as rural markets is concerned because we have had fairly encouraging growth as far as rural markets are concerned. And let's see how the cutback in budgets, et cetera, et cetera, how that plays out as we move forward. As far as inflation is concerned, yes, it is here to stay. And typically, the company has got 3 or 4 levers that it uses. Number one is portfolio; number two is economies and cost efficiencies; number three is sweating its assets and as David McDaniel said, leveraging the impact of scale; and number four is pricing. So these are the 4 levers that we've got available to us. And using the different capabilities and the ability that we have as an organization, this is what we will leverage. But as I told you, the first privilege is economies of scale. Then cost -- then economies of scale and cost rationalizations. And then, of course, the sweating of assets in order to get the benefits of the infrastructure that we have and finally coming to price. How much we will have to touch on each of these, I think time will tell. But these are typically the levers that are available to us as a company.

But is it going to be a long-haul fine or is it going to be something that you can go in the next -- in the short and medium term?

Look, I wish I was a futurologist to be able to tell you exactly how long [indiscernible] will last. I can only tell you that today the pain is set. So today, my arm is hurting that much I can tell you. Whether I can play Nadal next year, I don't know. How many questions are we left Shashank with? 2, 3 I think we can take it, but if it is more, of course, then.

Yes, sir. In fact, nobody in queue, we managed to reach out to all of them. We can try and take one from Percy who has tried to connect back again through his friend, Samir. Samir, if you would like to go ahead, please.

Percy doesn't seem to like me, I think. I mean last time also, he decided to blank out. And this time also, he's doing the same. Percy, not fair.

Samir, you'll have to unmute yourself, please? I think we are again having a challenge. We do have a few more people in queue, would you like to take or...

Okay. 2 or 3, we can manage, but if it's -- could be like 20, then obviously, it's...

Yes, sir. We've got, in fact, 4 people in queue. So next in queue is Amnish.

But my request to all of the ones who are asking questions, please ask 1 question, please. If you ask -- each of you ask 5 questions, and obviously, becomes equivalent to having 20 people on the call.

Amnish, you can go ahead.

Am I audible.

Yes, Amnish.

Suresh, my question is regarding the Milk Products and Nutrition, where if I look, say data for the last 7 years, we never had a double-digit growth. So the maximum in many year, we grew by -- was around, say, 8.5-odd percent. So there are 2 segments to this. One is your dairy segment and another is your nutrition. So I would like to know, first of all, how is the breakup now between the Dairy segment and the Nutrition segment? Which segment are we suffering? And do you think that the kind of changes which are happening in the Dairy sector in India, whether it is from the cooperatives or some of the other private players. So will this competitive intensity sustain over the longer term and will our growth rates here will remain in the single digits.

Look, I think it's a good question. It's a fairly large and fairly important segment for us. I would say that if you look at milks and nutrition, the nutrition part is clearly growing quite well. And especially the new segments that we are having in the toddler area is growing even better. So the consumers today are seeking quality of nutrition, quality of the product, trust and various other elements that could go to define the competitive advantage that we enjoy as a company. So to that extent, I think it remains for us an important vector of growth. And it will continue to do so for a while. Yes, competition, obviously, is intensive in the dairy sector. But I think one of the equations that we are very clear on is that we are in the business of selling value-added products that have a sustainable top line and bottom line. We are not a empty calorie company. So I will not be having products there. We make 0.5%, 1% or 2% margins and expect to make a business out of it because that is empty calories that honestly doesn't satisfy you and doesn't certainly satisfy the other investors and doesn't satisfy the company.

Okay. Sir, just 1 thing. Do you see the growth rates actually crossing our peak of 8.5% in the near term?

Very difficult to say. I think the track record has been relatively strong. And during the pandemic, in fact, it has been fairly strong. Let's see how it pans out. I think the question you should be asking me is that will you be capable of -- and the base grows every year, will you be capable of sustainably adding to the overall kitty. As far as the company is concerned, the answer is yes.

Our next question is from [ Abhijit ].

My question was on the CapEx side. You had talked about INR 2,600 crores of CapEx. And so I wanted to know what's the status, how much of it has been already incurred? And whether that CapEx was sort of instrumental during the year? I mean, was it the plans in use. And so on that...

Thank you, [ Abhijeet ]. And I will like to pass that on to my able colleague, David, to answer you.

Okay. Thank you for the question. The short answer is plans are on track across all the categories in that INR 26 billion that we previously declared. And during the year, we've capitalized -- or we've spent, sorry, about INR 7 billion.

Okay. And just one, if I could slip in, just one. On the -- again, on the milk and nutrition part, what I understand is milk is -- gives you good growth. But the real strong growth, long-term growth remains in your nutrition part where you have done a really great job on the growth on the toddler part. So if we have to just disseminate the growth between these 2 during the year. So was the sort of bit of a tepid growth initially was that because of milk more. And while nutrition was stable, would we be right to say that? Nutrition has continued to grow at a very stable rate.

No, I think the base effects for both came at different times. Milk came in early. The uptick in nutrition came in a little bit later. So in a sense, both the categories were beneficiaries of the spike during the -- during COVID. Obviously, because of the nature of the comeback, Nutrition came back more strongly towards quarter 3, quarter 4, whereas milks were doing better in the first 2 quarters. You are seeing that differential performance averaging out over the year. But I want to tell you fundamentally that, yes, both the portfolios are fairly strong portfolios of the company. And I think it gives us a lot of hope for the future. Except I would like to add that somebody can always say, look, milk, why aren't you even bigger than what you are. I think the danger there is to be sent in empty calories, and I want to put it up front to you that we are not interested in selling empty calories. I mean I don't want to just sell a product that makes a very, very weak margin and call that business because I don't think that's what you expect from Nestle.

Thank you. So the queue is showing 1 question left. That is from [ Minakshi ].

I wanted to understand that this rural growth of 9% to 10% that you just mentioned, so this is in the past quarter, like could you dwell a little? And also, sir, the selective price hike that you talked about, what quantum have they been taken and where all have they been taken?

Nice to hear you, [ Minakshi ]. And yes, the rural growth has been, as I said, the 9% to 10%, it's been a fairly strong growth in the portfolio that is represented in rural markets. As I look forward, as I answered the question earlier, -- it's difficult for us to [ prognosticate ] how long this would last or whether there'll be any impact of any of the of the potents of weaker economic performance that is being seen. But nevertheless, as of now, the growth seems to be reasonable. It is -- yes, it is in the last quarter. But the growth, but I think you will see progress on our rural initiatives as you move forward. And as our plans also start to unfold, post the come down of the Omicron wave. A lot of the physical operations will start happening because that's one of the things that has been impeded during this period. In terms of price changes, I would say roughly about 1% or 2%, 100 to 200 basis points of prices have been affected today. And we are still looking at the math to see what more is required in the pecking order that I talked about, cost economies, efficiencies, infrastructure setting and then pricing.

Yes. [indiscernible]. Network issues. If you allow, then shall we close the proceedings for today?

Sure. I think if that's the end of the questions, then I just would like to take the opportunity to thank everyone who's joined on the call today. I hope the presentation was able to clarify some of the issues that are being reflected in the results. Also some of the issues that are impacted to the results so that you have a much clearer understanding. And you also have a little bit of a granular idea on where the company is going and what are the kind of initiatives that it is looking at. So really thank you all for your joining on this call, and I appreciate you taking the time. Please remain safe, and please remain secure at this time. Thank you very much.

Thank you, Mr. Narayanan. With that, we conclude the session. Thank you, everyone.