Nestlé India Limited (500790) Earnings Call Transcript & Summary

Hi, everyone. Welcome to the Nestlé India Half Year Earnings Call. I'm Shashank Kumar Nair, Senior Manager, 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, Corporate Affairs. Now before we get started, let me first read out the standard disclaimers. 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 change 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 operation due to unforeseen events, including as a result of the spread of the disease. Volume and mix and organic growth are basis in Nestlé Internal Reporting Standards. Figures are regrouped/reclassified to make them comparable. Calculations are based on non-rounded 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 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 or presentation must not be relied upon as having been authorized by or on behalf of Nestle India Limited. As per the agenda today, we will have a presentation followed by the question-and-answer session. Once the presentation is complete, I would invite you to exercise the raise hands options on MS teams. Once you have raised hands during the Q&A session, my team will enable your mic when you're first in queue. I would request you to please then unmute yourself and state your name and organization before proceeding with the question. In the interest of accommodating as many questions as possible, we would be grateful if your questions are brief in nature. As per factors, 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.

Thank you. Thank you, Shashank, and good afternoon. Ladies and gentlemen, good evening to those of you joining from different parts of the world. I do hope that this finds you all safe and secure at this time and in good health. The title of what I'll be sharing with you today is, in some sense, reflecting what the organization stands for. Unwavering commitment, a commitment to India, to the consumer and to the future. Resilient journey. We have been through a lot, seen a lot and are prepared to also see more in the future. And promising horizons that there are initiatives, there are changes and there are welcome steps that are being taken by the organization in order to embrace the future more secularly and more dynamically. So without much ado, let me take you through some of the key takeaways last time just to keep to the manner in which we've had our conversations in the past. Sustainable volume-led growth. Remember that 7 years ago, the strategy that was initiated by the company was penetration-led volume growth. When there is no penetration, there's no volume. There's volume, there's no growth, and there's no growth, there is no sustainability of the future results of the company. That was a simple mantra, the simple model that we took. This really went 1 clear philosophy of the company that we will not be sitting on the hubris of market shares, but we'll be looking at the humility of the penetration task ahead, and that's what will define us as a company in the future. And that's really what we have been trying to pursue in all these years. Secondly, strong value growth across both rural and urban India. This has led to a sustainable performance in terms of top line and bottom line despite the vagaries and despite the circumstances that face us. Innovation continues to be an engine of growth because this company is all about multiple brands, multiple offerings, multiple stages of life. I'm really giving a bouquet of variety, nutrition and the salience at different points in time. We implemented the future-ready plans for our people. We talked about it last time and the implications of that. We are strongly committed to and we shared the transformation using data and analytics in our journey forward to make ourselves a more professional, a more agile, a more adaptive and more anticipatory organization that is quick in taking decisions based on professional information and data at all points in time. Sustainable initiatives at the core of being a force for good. For us, sustainability is not a fashion. It is not a boardroom conversation. It is an intrinsic part of our business. Note that I don't talk here about the term ESG, I talk about the term sustainability which is more all-encompassing, and it is more meaningful in the manner in which we conduct our business. And finally, we talked about them, which are excessive bated now, immediate concerns on inflation, while the road looks promising. So these were the 8 messages that I left you with the last time. What is it that we will be talking about today? We'll be talking about the financial highlights of the first half performance and results have just been declared a couple of months back today, as you know. And we're talking about the Purina PetCare business and what is it that is exciting and what is it that is welcome about this business. And also on the horizon, some other initiatives that hopefully will bar the engine as we go forward. So let's go to the financial highlights of the first half. The sales in overall terms is consolidated sales have improved by 12.7%, double-digit growth, definitely. If you look at the last 22 quarters, for which we have the information on sales. 17 out of the 22 quarters have been double digit. 4 quarters have been very high single digits, almost double digit. And only 1 quarter, which is quarter 2 of 2020 when we were struck by the first blow of the pandemic, that we record a growth of 2.6%. So growth has remained an intrinsic mantra of this company. And that's what you see in 12.7%. However, as I'll come to a little bit later to give you more granularity, the forces of inflation have clearly been much larger than what we are normally used to. I dare say, quite extraordinary in the last couple of months. And that clearly has hired a small dent as far as our profits are concerned. So our profit from operations have come down in the first half by 2.9%, net profit by 2.7% and therefore, as a consequence, earnings per share by 2.7%. This is not to despair the business model, but this is to highlight what is it that we have done during this quarter in order to protect our engine of growth. One thing that all of you know from experience and since you have been tracking businesses for a long, long time, growth is what ensures a sustainable result. Anything multiplied by zero is 0. So if you have 0 growth, you can have the highest margins, and yet you will have a rather putrid result. And that is the belief that we have got that in inflationary times, it is most important for an organization for the corporation to protect its engine for growth. It is not managing for the quarter. It is managing for the long term. And as you know very well, Nestlé is a long-term company. We are not a short-term company. We're not here for the quarter, we've been here for over 100 years. So sustained volume and mix-led growth in a steep inflationary context is the shorthand of the result that has been achieved so far. The CAGR has been in the last 5 years at 8.1% in terms of volume and mix. You can see the volume evolution on the right on a quarter-to-quarter basis, also positive. And the core objective of the organization was to protect the engine of growth so that penetration-led volume growth continues to happen in our business. The day that this stops, ladies and gentlemen, is the day that we will have trouble with our growth. The first half has seen a value growth of 13.3%. This 13.3% has a price -- a consumer price impact of 6.3%, which means that the volume growth has been about 7%. In CAGR terms, this has given us a result of close to 10% in the 2017 to '22 period 9.7%. I do reiterate the point very clearly, if the growth engine is weakened, the future is compromised. That is the result, and that is the lesson that we have learned over the years. I draw your attention to the right-hand side of the chart that tells you the quarter-on-quarter performance. Quarter 1, 2022 on domestic sales and quarter 1, quarter 2, 2022 under domestic sales on a sequential basis, you will see that going up from 10.2% to 16.4%. If you look at the volume base of the company on a reported basis, or the volume and mix effect that we talked about of 13.3%, the comparable for the same period last year was 13%. So you can see that on a high base, there has been a high result. So we have not had any benefit of low base effect to give us our sales -- it has been on a high base, and we have also grown quite handsomely within speed. What is heartening is to know not just that the human being is healthy overall. But how strong is his ECG. And ECG is measured in our business by the texture of sales across different markets and across different income segments and across different populations. If you take mega cities, which is those cities which are over 4 million in population, these were adversely affected, as you will see from the graph in 2021 because of the pandemic impact, having a serious impact, adverse impact on the operations in terms of market, in terms of distribution, in terms of various other aspects. We see that normalizing today. In fact, the Google measures and other measures of mobility are showing that despite the fact that the pandemic will not be entirely out of the country, we still have learned a mechanism to open it and certainly in mega cities that is happening. And you see that playing out in terms of growth as well. You see our growth on an uptick in mega cities. The same is happening in metros that is those cities between 1 million to 4 million population. Once again, the growth numbers are a double digit. Once again, there is an uptick in the last couple of quarters. What's even more heartening, and I remember I talked to you last time about our goal on strategy. The question you asked me was that this company is an urban company, what is it doing in semi-urban and rural markets. And he said the market was getting prepared because the aspiration and availability had to match. Those are bearing fruit for us. You see the Town Class 1 which is those towns with less than 10 lacs population. They are growing also handsomely by double digit. Town Class 2-6, which is really below 1 lac population, the small town India on [ bartaco ] as we call it, also growing handsomely in double digit. And what is more heartening, and I know that I speak of a lower base in rural markets. For us, ladies and gentlemen, the rural markets are also doing well. Villages and the villages that we cover. Remember that the objective of this company is to cover 120,000 villages, which is all villages more than 2,000 population. We have covered about 70,000 to 80,000 of these villages. We are seeing the uptick happen in terms of our sales, 9%, 15%, 30.7%. Rural indeed will be an engine of growth. And if we continue with the good monsoon this year as is our hope, and we can move forward to not just an exacerbation of some of the commodity costs, hopefully, but also look at a demand generation that will be really encouraging as far as the company is concerned. So the overall growth 13.3% first half, 6.3% on pricing, 7% on volume, town category-wise, mega, metros, Town Class 1, 2-6 and villages, all are on double-digit growth. That's the bottom line for our quarter 2 performance. And that is the reason why we talk about securing the growth engine. What are the headwinds that we have faced? I want to keep this chart very, very simple because the most volatile situations are explained by the simplest of charts. 2018 to 2020, we look at the CAGR of commodity inflation, 3%; 2021, 5%; 2022, 15%, 5x of the current, the unprecedented. Now there are 2 ways in which a company can tackle. One way is to take industry-led price increases. And yes, remember that in 8 out of the 10 categories, Nestlé is a market leader by trend. The showbiz or market share start to work against you and you indiscriminately take price increases in order to mitigate the situation. A wiser Council and a wiser management goes towards balancing pricing, balancing margin expectations and retaining the CAGR of growth that is required for the future. So out of this 15%, if you look at the second quarter, about 8.5% was the kind of pricing impact that we do. Second quarter, if you will recall, has a growth of 16.4%. 8.5% of pricing, 7.9% of volume. Volume is still growing extremely well. That's the bottom line. Today, we start having volume declines that are sharp irrespective of the value growth that I will show, irrespective of the profit growth that I will show, I will be having a system that is getting followed up and that is getting eaten forbidden. And that's not a good situation, again. So therefore, if you look at the 5x impact on commodities, clearly decide a short-term impact on our profit from operations. Despite the fact that in the 5-year period, it has grown by 11.2%. Despite that, there has been a short-term impact. And yes, those are the numbers that you're seeing. If you look at it on a sequential basis, from 21% to 18.2% in terms of profit from operations. What, however, is heartening at this stage and these are early signs and therefore, that could a [ cardiac ] to it that these are early signs, there is some softening as far as the edible oil complex is concerned and packaging materials are concerned. Nevertheless, fresh milk, fuels, meat, grains and green coffee are expected to remain firm. As you saw in the papers today, meat is reaching all-time high prices because of the low stocks that we're holding as a country, also because of the [ ICI ] question mark on the quality of the monsoons. This has been a short-term impact that we have fixed. Net profit, consequence of that percentage slightly lower because of the tax impact. On a CAGR basis, still very encouraging at 14.2%. 10% on top line, 14.2% on bottom line despite vagaries that we have faced. Let's look at the texture of performance. So I talked about the ECG of performance. Let me look at more -- some of the other white indicators of growth. Our 4 major categories, Milk Products and Nutrition, Prepared Dishes and Cooking Aids, Confectionery, Powdered and Liquid beverages. First half growth, as I mentioned, 13.3%, Milk Products and Nutrition has grown by 7.2%. Once again, we have examples of brands that are as old as the hills. Milkmaid is 156 years old and has had one of the fastest growths during the first half of this year. Prepared Dishes and Cooking Aids. And yes, I do recall that many years ago, I was told that the only product that Nestlé has is Maggi. Today, we have many more products. And Maggi continues to be strong, 13.9% growth. Confectionery, super strong growth by 24.4%. The 80-year-old brand like KITKAT is growing strong double digits as is much as its rest of the [indiscernible]. Nescafé and associated brands and the other firm growing very strongly at 21.7%. So the texture of growth is also showing that across categories, we are having strength. Innovation continues to be an important element of our growth. If you look at products launched since 2015 and track them as a percentage of sales, today, we have about 5.6% in the first half. It comes from innovations and renovations that are being put through in the spin. I, however, like to add that during this period, the focus has been on the core. It's important that we secure the growth engine of the company that you secure the core of the company. There's no point in a tendency to expand the portfolio significantly when you are not able to protect the core of your organization and these 4 categories are the core of the organization. So therefore, we have protected the core and we have also done innovation and almost 100 new products have been launched in the last 5 years. All this has been creating significant value for investors. If you look at the comparative periods of the last 21 years and you take the closing price as of 26th of July 2022, not today's price, but versus July price. You would see that our annualized return is close to 20%. We have outperformed the FMCG benchmark index quite significantly. And today, we enjoy a market capitalization of almost $23 billion to $24 billion. A price and mix, that is salutary, and I want to thank you all for the confidence you posed in the company. We've always talked about finding new growth engines for the company. And premiumization is one of the growth engines that we have talked about. Today, I want to talk to you about 2 specific engines that we are looking at for the future acceleration of this car. The first 1 is Purina PetCare. Any of you will be having pets. Some of you might own pets in the future. And 1 thing you all know about pets is like they are like our children. The very best of nutrition and the very best of care is what keeps a happy home. You might be unhappy with the color of your shirt, but you're even more unhappy when your dog has gone badly [indiscernible] and does not come to you with happiness and joy. And we know that a lot of that has to do not with just how we treat the pet, but also what kind of food we give the pet. Here is a happy dog. It's a happy dog face because PetCare has an exciting future for us. The category is worth about INR 4,000 crores today. That's the estimate that we've got. It's a category growing at 25%. It's probably one of the highest growing categories that you've got amongst all -- if you can call it a consumer friendly, it's consumer friendly all because pets are also consumers for us. Pet adoption is on the rise, especially post the pandemic. I think the vagaries of the pandemic, the [ troubles ] of the pandemic, the emotional disconnects that have happened has led to an increase in pet adoption. Today, we have an estimated 30 million pets growing at about 11% per annum. So there are about 3 million pets in care each year. Out of this Dry Dog Food, dogs are the main ownership in this country, 75% of it is Dry Dog Food. It is the biggest segment. And what is very interesting? What is very interesting is the Wet Cat Food is also a strong opportunity. Wet Cat Food is growing at 35%. So category of INR 4,000 crores, growing at 25%, pet ownership growing at 11% across town classes. Owning pets is no longer just a metropolitan phenomena. It Is a phenomenon across the country. Dry Dog Food being impressive at 75% and Wet Cat Food also growing significantly by 35%. What have been the strategy and learnings of Purina in India, and that's something I would like to completely talk to you about. We have built the Pet Specialty distribution network in 46 towns. The business began in pet specialty stores. And that's why we have taken a view at that stage. This is not an area of expertise for the company because we don't sell anything to pet shops, now for our brands, mainstream brands go to pet shops. But this is where the market was and the market is what? We have nurtured this category with expertise, 70% of the sales team have got PetCare sales experience or marketing experience or supply chain experience of 4 years plus. So we built the carter of people who understand PetCare. The growth has accelerated 68% in 2021, 51% in half 1, 2022. The channel, and this is one of the consequences of evolution of the category and also the pandemic has evolved from a focus on specialist channels to omnichannel with e-commerce today contributing about 14% of sales. So there is a multichannel and omni-channel approach that is coming in PetCare that is quite significant. We are market leaders in pet care worldwide. It's one of our strongest businesses. And Purina has invested for about 90 years, an army of over 500 scientists, nutritionists and pioneered some of the firsts in the category including the first extruded pet food. Why do I say this? Like all our categories, there is a domain expertise in static. This is not a category that we have just kind of thought, oh it's a nice idea. We've got experience in this, we've got market leadership group. We've got science and technology and heft and R&D centers and factories and people who are focused on this area. And it's a growing category and it's a [indiscernible] . Global investment including our PetCare. Remember, the first entry was done by Nestle S.A.'s wholly-owned subsidiary, Purina PetCare Retail. Because of the uncertainties that we had on the business, we said, let the parent invest in this business in order to get it started. And that's what they did and invested about INR 126 crores in this business. And finally, we noticed a lot of opportunity, synergy and leveraging the heft of the company, the Nestlé India network would further accelerate growth in organized trade, quick commerce and Tier 1 and Tier 2 towns. This has been the evolution in the last 4 years. What has been the strategy and evolving category? If you look at it, quite simply business -- the Purina business has performed very strongly at high double-digit growth. What's important in this category is not just the quality, but the salience of the product as well. And I'm delighted to inform you that SUPERCOAT, which is the brand of pet food -- wet dry dog food that we sell has been voted the 2021 Product of The Year. That means that this has got the color of the consumers in terms of the quality, in terms of the nutrition, in terms of the reliability and trust for this brand. Portfolio expansion in fast-growing segments like Wet Cat Food, that's the other opportunity that we talked about and new route to market opportunities have also emerged in the last couple of years. Expansion to Tier 1 towns and e-commerce is playing a big role in the expansion of the PetCare business in this country. And finally, there is a scope to unleash the business potential in smaller towns and what better heft to use than the heft of Nestlé India, the infrastructure of Nestlé India. So it makes sense for Nestlé India to take out the business at a stage when the establishment has been done using the Nestlé S.A. investment and expertise in India in order to build this business as a future arm of growth and progress for Nestlé India. This is the progress. It started as a small business in 2018 at about INR 11 million -- INR 11 crores, INR 7.5 crores is closed 2021 at INR 31 crores. It will be closing this year, hopefully, at INR 46 crores in part a little bit higher. We are built in this time, 46 towns with 50 distributors as far as the specialist channel is concerned, 185 suppliers spread all across the country. So the infrastructure, the bedrock, the ecosystem has been created for this business. Today, we depend on imports on what to depend on the evolution of this business going forward, 2 factories, Amata in Thailand that gives us SUPERCOAT and Friskies and Blayney, Australia that gives us brand topline. What are some of the products? Premium Dry Dog food, which is SUPERCOAT. Pro Plan which is a super premium dry dog and yes, this is a product meant for puppies with cholesterol, which is the best and the most celebrated product in the Pro Plan reach. It is the super premium product but it is the best for your puppies. So those of you who are planning to own puppies, here's a product for you that is guaranteed to work for the puppy and work for itself. Premium Dry Cat under Friskies, as you know the brand, have super premium wet cat under Fancy Feast. So these are the products that we'll be marketing and we'll be supporting in the country. I will say that you said something in 2018 and we said the same thing in 2020. Then people hadn't been transparent to the ways. I'm not hearing anything from what we thought and what we are doing today. And I think a hallmark of trust and transparency by the organization is the capability and the sharing of its ego to revisit the assumptions of its original business case, and that's what we're doing today. In 2018, we had said that PetCare as a category is still evolving in India. We're realizing that it will accelerate the way it is accelerated. Today, it's become an exciting future. With adoption on the rise post-pandemic. Clearly, there's an opportunity here and there's a bend in the Ganges that has happened here that is significant. We looked at it as a no synergy for Nestlé India's business because it was largely being sold in pet shops, and we have got absolutely no truck with pet shops, neither MAGGI, nor KITKAT, nor Nestlé are known to be franchised and known to be favored by dogs and cats, at least to the best of my knowledge. There are far greater synergies with evolution in channel strategies today. Leveraging Nestlé India's network will accelerate the growth even further and finally, limited route-to-market and category marketing expertise, which we have invested in a bit. Remember, the money that Nestlé S.A. has put behind this business is to build this expertise in the context of the market. So today, we see significant competitive advantage and expertise to leverage. Some of you might say, most welcome. Some of you might say, I told you so. Whichever way it is, I think it is important that this business becomes the growth driver in the future of Nestlé India. And that's really what is being proposed. You've seen the other elements of the announcement in terms of the price, in terms of the valuation, in terms of the governance that has been used in this entire deal in that all the Executive Directors, me and my 2 colleagues, David McDaniel and Matthias Lohner, has abstained from the voting on this proposition completely because that is what the Board governance is all about. So we have kept it completely and totally transparent and clear in terms of the direction that we want to be on this business. That's one part of the business. That's the exciting part. I'm sure the dogs and cats will say we want it today and the fact is we definitely are excited about this because this is an opportunity that we see for the future. On the horizon, what do we have? I'm being a little bit tongue in cheek I know this but I take this liberty with you guys because I know you for the long time. And always, one of the phrases that has been quoted to me has been that nutrition is a mature business, it's a boring business. I just want to tell you, ladies and gentleman, that the endeavor of Nestlé India has been to find new avenues for growth in this business. It's a powerhouse, and it's a great business and it's a business that deserves even more attention. And that's really what we are looking at today. Remember, the kids grow up, they become toddlers and then they become young adults. And then they run away and then they go to college and university and then take on their lives. But they are toddlers between the age of 2 and 6. Many of them have got mothers who read, who understand nutrition, who read labels, who participate in parenting blogs, who consult multiple sources and ensure that their child gets not only the best tasting products, but most importantly the cleanest products and the most nutritious products. The mother is herself self-assured. She's a young achiever and constantly strives to upgrade her and her family's life. This product is designed for the uncompromising mother who has choices, but still we choose the choice that is the best for her child. How big is this segment? We estimate it's about INR 3,500 crores in this country, and growing. Because nutrition, post-pandemic, has become front and center. Nutrition, health, immunity and wellness are 4 words that have become most common in usage post-pandemic, and I think it's becoming more and more important as we go forward. So this is announcing the launch of Gerber. It was a brand discovered by a mother in 1928. So it's an old brand. The first Gerber Cereal was launched in 1931, so 90 years ago. The first Gerber television commercial was aired in 1950, 75 years ago. The first Gerber glass jar came 62 years ago. The Gerber range of graduates began in 2002. Gerber joined the Nestlé family in 2007 as an acquisition. In 2009, well before the word digital and well before the personalization of services was becoming an essential element of brands and propositions, Dotti had been put by Gerber as a personalized expert. And of course, in 2022, we launched Gerber in India. So announcing to you the launch of Gerber. What is the promise of Gerber ? The promise of Gerber is that it is a 90-year experienced brand globally that understands your needs and reassures you of the best nutrition for their toddlers, so it is meant for your toddlers. Our range of power blend cereal has been developed for Indian toddlers, combining the benefits of 4 diverse groups, cereals, legumes, milk, fruits, vegetables with age-appropriate fortification to offer. It's a nutritious, healthy and tasty product, Gerber cereals with power blend, anything for your little ones. Because remember that for us our children are extremely important and their heath and wellbeing is the center of our lives. This is what it is. It is made in India and made for India. Made in India because it is made at one of our nutrition factories and made for India because this is not just an imported product that's been put on the shelf. This is customized. This product is developed and customized to the nutrition needs of Indian toddlers, as understood by the science of nutrition, as imparted in Nestlé which incidentally is one of the world's leading players in nutrition, health and wellness. So this is a brand that has got purity at its center. What is the promise that it offers? It talks about communities and not communication. This is not just a brand that puts all pieces of communication and delivering commercials and digital pieces. We seek to build communities around it because we're talking of cohorts of mothers who are interested in and involved in nutrition, in the efficacy of nutrition, adding the health and wellbeing of the children. We're also having the ambition in this brand for co-creation. So this is not just a unilateral brand that goes one way, saying here's a flavor, take it or leave it. This will have cohorts in co-creating this brand because co-creation, communities and services are going to be the center of what makes this brand successful. It's also incidentally a brand Gerber that is being made at a factory that recycles up to 30% water, we're telling you a bit about sustainability, and the promise to collect and responsibly manage equivalent quantity of plastics created by our products. So this is a brand that we are excited about because this is a brand that is premium. This is a brand that brings in the value of nutrition. And to just give you an idea, I've been talking about premium, just to give you an idea. If MAGGI Noodles Index price is INR 100 for a kilogram, the average pet food is about INR 140, and Gerber is INR 700. That's the kind of premiumization that you're talking about in this brand. So there is a significant element of premiumization that we are talking about because this is what nutrition science, technology and expertise brings together in these products. So what are the key takeaways that I would like to leave you with this time? Firstly, we have not compromised the long term for the short term. We have not compromised the engine of growth because the engine of growth is an essential element of the future of this company. Recording a 16.4% growth, recording a 13.3% growth are not small numbers in the context of the inflationary situation and the overall economic context that we have today. And remember, once again, that we're talking about a high base, we're not talking about achieving it on a 2% base or a 3% base. We're talking about achieving it on a 13% base. And therefore, that's really important. So the robustness of the growth engine is what we would like to continue. Securing growth matters. I've said this very clearly. We've had commodity headwinds, the headwinds still persist in parts. We are hopeful that some of it might abate over a period of time. Time alone with tell how we perform against all this but the intention is to keep the growth model secure, give us the benefit of the future. Petcare offers vibrant opportunities. Remember that happy dog face. This is what we hope that we'll also have on our faces when you look at the future of petcare within Nestlé India. Confidence and capability of strong brands to withstand the kind of inflationary pressures that we have got. We're talking here of not insubstantial by a balancing between volume and prices. Our brands are strong, our brands are trustworthy. Customers and consumers bless our brands. I don't call this the arrogance of pricing power, I call this the power of brand equity and it is our brand equity that is able to sustain us over a period of time. And finally, Gerber, the entry of Gerber is not only a sign of our entry into premium toddlers food, but also indicates the market potential that we see and confidence that we see in India. So I thank you all very much for your patient listening, and I do hope that I've been able to, as clearly as possible, explain to you the context, the actions, the future and the prospects. Thank you very much.

Thank you. Thank you, Mr. Narayanan. We'll now open the floor for questions. [Operator Instructions] Yes, we have -- we are starting to get the questions. We have the first question from Abneesh sir. Abneesh, please go ahead. [Operator Instructions]

Am I audible?

Yes, Abneesh, please go ahead.

So firstly, congrats on numbers and Purina and Gerber. So my first question is on Gerber. So you have mentioned INR 3,500 crores market size, so want to understand who are the key players here. Second is targeting 2 to 6 age bracket, not easy, given a lot of alternatives are there. Recently, the brand owner of Horlicks said because of the inflation and in general, high pricing, clearly, it is not easy, and we have seen Horlicks and Complan, et cetera, see growth challenges, plus the INR 700 index pricing versus MAGGI at INR 100, why not look at a more affordable option? So these are the quick questions on Gerber.

Thank you, Abneesh. Thank you always for your sharp questions. I think when I talk about the segment size being INR 3,500 crores, it is really a motley of different kind of product activities that come into this. So there are snacks, there are healthy snacks, there are a bit of biscuits, there are cereals, all this put together in our estimate is about INR 3,500 crores. There are a few players, a few small players and a few credible players who are there in this race. What, however, is different and I'm not here to either make the case or to decline a case for what Horlicks might feel on a particular opportunity. This brings the power of nutrition, customization, clean labels, sustainability and the highest quality that mothers can get for their toddlers in terms of [ nutrition ]. This is not a context, we have got brands. For example, we've got a brand called CEREGROW, which is also a very powerful brand. That also gives the power of nutrition. It does extremely well. It's been one of our fastest-growing brands again in the toddlers segment. The reason why it grows is because it has credible nutrition, and perceptible performance or perceptible change as far as the mother sees in the overall health of the child. So we are not here talking about a milk modifier or we're not talking here about another chocolate flavor or a vanilla flavor or something else that we can offer. This is a serious nutrition and serious nutrition is serious results. So that's the reason why we are confident about this. Now how this will evolve, obviously, it's going to compete with a lot of other product categories. And remember, Abneesh, I talked about discerning consumer. This is the mother who understands nutrition, who goes through nutrition blogs. There are a number of women today, you will know, Abneesh, quite a few, and I know quite a few, who are genuinely interested in the quality of nutrition, would read every label and will figure out every ingredient that there is on the pack and are fairly significant in this country. I'm quite confident about the traction that we can pick up because Nestlé is a very credible name in nutrition. I'm not launching a cola or I'm not launching something, I'm launching a nutrition process.

We have the next question from Shirish. Shirish, you may please go ahead.

It was very impressive presentation. Two questions from my side. One, on the inflation part, if I collect what you have shown, the inflation is running at 15% and half of that you have passed on through the price increases. In the current context, being a food company, or largely, it is non FMCG, I mean, I can say that it's more of a processed food company, do you think the consumers has reached to a tipping point and it will start showing the consumption fatigue or the pricing will drive the lower consumption? Is that your understanding? And second, on the related question, in the prepared dishes, we have a good benefit from Sanand factory. So just a question on Sanand, how much is the capacity utilization at this point of time? And my second question on Purina. You have given a lot of data points, but I was more interested in terms of distribution, if you can help this 30 million pet which has been serviced by the local, how many is the distribution touch point? And what is the whole strategy on creating the brand awareness and pushing into the trade?

Good questions that you've got. Firstly, your question on the tipping point for consumers. In fact, my friend, Shirish, the reason why we are taking a view to secure the engine of growth and not to go berserk or not to go even more aggressively on pricing is to secure that engine of growth. We do realize that during this time of heightened economic distress and also of budgets being fairly constrained, we should not trigger significant downtrading or moving out of our brands by putting it completely out of whack in terms of affordability. Therefore, in the pricing that has been done, we have tried to secure our price point on our popularly priced portfolio, which is not a significant part of our portfolio in terms of the headwinds of commodity vagaries that have been faced. So we believe that the decisions that we have taken, we have a reasonable chance of being able to sustain this. However, I mean, there is no -- there is no predictive model that says, look, taking a price for 6%, could have been optimized at 8% or 10%. There is always a price to pay for this. What we have believed in our -- we've got a fairly sophisticated decision making models within the company, using the power of analytics to see what kind of elasticities and what kind of transaction losses will be generated by what kind of price increases. We take a collective view of this, and that's really what has led us to this situation of the current mix between pricing and volume. Roughly 50-50 is what we're operating at, which is probably the best case scenario to be in. And I mean we could always have a little bit more on volume, a little bit less on pricing. But the fact of the matter is that this is an optimal model. So time will tell, but I think we are reasonably secure and you've seen this growth of 16.4% on an earlier higher base of growth as well shows that there is some resilience as far as the brands are concerned. Secondly, as far as Purina petcare is concerned, I think you asked a very good question. Today, we are in 64 towns in about 50 distributors. And we've got a couple of thousand outlets, both the pet shops and also the modern stores that we have started distribution in. I think the acceleration will happen now. The acceleration, the opportunity is now. When we consolidate what we do with the pet shops, we've got about 14%, 15% contribution coming from e-commerce, which is growing well, which is an engine of our growth as well. Overall terms, Nestlé has about 6.4% from e-commerce. And this category has got 14%, so almost twice, 2x is the heft that petcare has, and I believe that with our distribution muscle that we have across cities and taking it into Tier 1 and Tier 2 towns, we will be able to get much stronger growth. So really, it is leveraging what Purina Petcare has built up and leveraging the distribution heft that we enjoy as a company and you agree, Shirish, that my distribution heft across modern outlets and across traditional trade wherever relevant is far more than what Purina Petcare India will be able to create in the next 5 years for itself to build on. Therefore, I think the logic has come to where it is.

We have the next question from [ Arnav. Arnav ], please go ahead. [ Arnav ], you are not audible right now. So I think we'll circle back with [ Arnav ]. [ Mangalam ], why don't you go ahead with your question in the meantime?

All right. A couple of questions. One, on the input inflation itself, you've said that there is some softening that you've seen in a couple of commodities, while a few commodities are expected to remain firm in the near term. At the same time, you were also looking at premiumizing your portfolio with the forays that you're making in both petcare as well as the nutrition, the toddler nutrition that you're talking about. So with all these things, where does the margin trajectory of the company -- what does the margin trajectory of the company look like in the near, medium and the long term? That's question one. And secondly, a lot of categories where Nestlé, I believe, would have the right to win. One of them would be adding nutrition to adults itself. We've heard ITC speak about looking at nutrition-based products, drinks, in particular, Horlicks has been looking at adding protein, et cetera, to their products, too. So in light of that, is Nestlé looking at this health food sort of thing with snack bars, proteins, et cetera, vitamin, the additive nutrition snacking options?

Thank you, [ Mangalam ]. Thank you very much for your questions. I think to answer your second question first, yes, we have a Nestlé Health Science portfolio that has got products that are specialized for adult nutrition, both for diabetics and for protein supplementation and for obesity, et cetera, which we will dial up. And I think there are opportunities there in core categories that we'll be looking at. I think we have a certain expertise there. But it will have to start small because these categories take a while to build. And we have to choose which ones to invest in because we can't invest in 20 different categories at the same time. We'll have to choose it, and therefore, we'll have to decide on parts of the portfolio. The first question of yours, knowing you, [ Mangalam ], you're a young man, and you really are wanting me to answer questions on the future by margin evolution, by quarter, but category. My apologies, I will not be able to give you any forward indication. All I can tell you is that there is some softening as far as the edible oils is concerned. There is some softening on packaging material is concerned. But equally, there is still a fairly firm price structure as far as milk is concerned, as far as coffee is concerned, as far as wheat is concerned and cereals is concerned. How this overall kind of mix will work out in the future, time will tell. But at least one thing I got to show you, [ Mangalam ] is that we have a growth model in place that is reasonably secure for the time being. And I think that is going to be important for how [Audio Gap]. And I think this is a point that Abneesh also made. I mean, the fact is, is that commodity headwinds are remaining for a while. So it doesn't mean that suddenly margins will become magical as we go forward. We'll have to live through this for a while. I can't tell you what percentage and what will happen, but all I can really tell you that the growth model is secure for the company, and we will take the tailwinds and the headwinds as it comes.

I'll take that as an answer. But if you could give me a sense of demand then while you were speaking, you did say that there was a smart recovery in rural. And that's unlike what the other peers have been saying as well. They say that rural has been lagging urban. Could you give us a sense of what exactly happened for you guys in rural? You have been increasing your presence there?

Yes. I think [ Mangalam ], let's be very clear. I mean, there is nothing kind of magical about the numbers that I talked about. I have, as you know it very well, I have a lower base in rural markets. And I think we have accelerated our rural strategy that is beginning to click. And obviously, penetration-led growth is happening in those markets. What you need to read in this is the acceptance of brands of Nestlé in rural markets to accelerate the growth. Kindly do not get carried away by the percentage numbers because I'm speaking of a low base. If you compare me to, let's say, an HUL or a Dabur or one of these companies, I mean, they've got a much higher rural component. Their brands have already been in rural India for a while. My brands are getting to rural India. The good news for you is that the brands are getting accepted. And that's why the last 3, 4 quarters, together with infrastructure and together with the orchestration of infrastructure, of investments, of brands and of communication, we've been able to build the traction on these brands and that is a good news.

Tejash, the next question is from you. Please go ahead.

Very detailed presentation as always. Sir, couple of questions. First, in our last interaction, you had mentioned about exports -- dialing up on exports as one more engine of growth and then catering to Indian diaspora also as a focused area. That was not part of our today's presentation. So just wanted to understand any follow-up comments on that.

Good question. Tejash. I think that endeavor remains, that endeavor remains. But let me make one thing clear. Export for us is a sourcing opportunity. So therefore, because we've got brands which are global, for us, the sourcing opportunity is on portfolio relevant to the Indian diaspora in different parts of the world and also, of course, sourcing opportunities of brands to particular affiliates of ours across the world. So these are the 2 components that we've got. We are seeing good traction as far as the third-party exports are concerned, about 10% growth we have seen during the second quarter. And I think we will be dialing up also the exports of the relevant South Asian portfolio to the diaspora in some of our key markets. So I think we are coming across a good reasonable contraction. But let me put it fair and square. I think the opportunity is both for -- the opportunity is primarily for portfolio that is relevant to the Indian diaspora that we'll be dialing up. It will not be -- for example, you can't expect me to export, let's say, NESCAFÉ, to United States of America because the fact is that they have coffee brands, they don't need to buy my coffee brands. But am I sending more of MAGGI Noodles, am I sending more of MAGGI sauces, answer is yes, because there are a number of Indian-origin people who stay there, in the U.S., and they'll be happy to consume these brands that they know from back home.

Sure. Sir, so that's very helpful. And second and last question on the new categories that we have entered today. Sir, we always had an option to enter in some of these categories in the past also, but very rightly, you would have waited for market also to be ready for this. And then you shared some of the category numbers. So from your global experience, is there any per capita income threshold where the inflection point for some of these categories actually come through? And once they attain that inflection point, if you can give us a reference point where do they actually mature as a category in terms of size or relevance and numbers?

See, I think in India, the capital income becomes a little bit tenuous because the fact is, Tejash, there are many Indias within India. There is a super-rich India, there is a rich India, there is a medium India, there is the affordable India, there is the lower middle class India and there is the poor India. So really, it's very difficult for me to put a per capita income and say, look, this is what it is. What is happening with these categories? Petcare, the 30 million pet ownership is largely amongst the middle and upper middle segments of the population. So you really don't have too many poor people owning a lot of pets or those pets are probably out into eating something else. So the fact is that it is that segment, and that segment is growing pretty well. I mean you know for your own experience, Tejash, that today, pet care, you've got pet salons and petcare facilities and kennel facilities and various things opening up across the country. Why is it opening up? Because people are interested in pets. People own pets and people want to. Even though the nutrition coverage, the petcare nutrition coverage is relatively small, it's just about 5% because people still believe that the pets should be given the paratha from the table. But the fact of the matter is that there is an increasing consciousness that good quality, balanced pet food is important for the life and for the sustenance of the pet. So I think it is that segment that we appeal to, and which is a fairly large segment. I mean, for example, in the city of Bombay, I'm told that cat ownership is going up quite significantly because cats are easier to maintain. I mean dog has to be taken on for a walk and in small apartments, that's very difficult, but cats kind of take care of themselves, I believe. So therefore, there is an opportunity there for people who own cats to give them not only Friskies but also they eat Fancy Feast as well. So that's on petcare. On the toddler segment, again, remember what I talked about, Tejash, I talked about aware mothers and talked about achieving mothers, I talked about, really speaking, [ SecA and maybe part of SecB ] kind of profile. I'm not talking here about the mother who's struggling with her budget. I'm talking about a mother who can afford to give a child the best that nutrition can buy. And therefore, in that context, the premiumization is what we're looking at. And you see this across segments. I mean, some of our premium brands are doing extremely well. So you think that, look, in a post-pandemic context, you will have all of these things doing particularly miserably, but they're not, they're doing fairly well. And it is that premiumization journey and Nestlé's capability to participate in it because we have the heft to do it. We have the capability, whether it is Gerber or whether it is petcare, there is a domain expertise that we have got in this. That's what we're known worldwide for. And yes, India is ready for it, and therefore, we come out with it.

We have the next question from Avi.

Sir, am I audible?

Yes.

Sir, I just wanted to understand a bit on the margin front. Would it be fair to argue that the return to the pre-pandemic EBITDA margins would need a moderation in inflation levels a lot more? And hence, is likely to be a little more back ended? Is that a right read-through? Or no, you think cost efficiencies can probably offset that, not from a timing perspective, but from what can drive it now going forward?

On a lighter note, Avi, you're finding a different way of taking the butter off the pot. I thought [ Mangalam ] was [Audio Gap]. He was really telling to me [Technical Difficulty] asking me whether [indiscernible] this. Look, the fact of the matter is and I think the math works out very clearly. When I'm sitting at 5x of inflation, and when I believe as a business, I am kind of maxing out on the balance between margin and price increases, the only way in which I can increase the margins significantly is when prices also start to relent and not just by playing the cost efficiency gain, which I'm playing still today. I mean, all that I'm talking about, still there is an underlining focus on what we call sharp savings and what we call operational efficiency savings. So none of that has stopped. I think my CFO is on the call, David McDaniel, I mean, he can tell you chapter and verse, all the various steps that have been taken on the cost efficiency part of it. But when I'm sitting on 5x, my friend, it's very difficult. I can't balance the books till there is a significant reduction in inflation that happens. And one is seeing some signs of it, that's the categories that I pointed out. If that continues on a sustained basis, if we land up with good monsoons as indeed, the country has been blessed with the last couple of years, and therefore, that will have a salutary impact on milk and wheat and a couple of other crops, then probably we will be able to return back to more normalcy in fact in terms of the sustainable growth model faster. That's all I can say.

Got it, sir. Got it. And sir, just on the framework of growth that you have shared, I just wanted to check whether you need to revisit the brand architecture in any manner to introduce any recruiter brands? Or do you see the existing brand structure being enough? Because in a bid to get recruitment in, you also want to ensure that the brand positioning does not take a hit. So I'm just trying to get your thoughts on whether you see that need as of now.

Good question, Avi. I think our brands are fairly robust enough to embrace different categories of consumers. So therefore, I remember every new brand that I add means a new avenue of resourcing, not only revenue, but a new conduit for putting in additional investments to support it. So I would rather leverage an architecture of brands that is a little bit more all-encompassing, looking at different buyer segments and looking at different purchasing power strengths rather than introducing intermediate brands or newer brands for recruitment and newer brands for uptraining and stuff like that. So I think that luxury we don't have in the context where there is a constraint in overall terms on trying to balance the sustainable growth. Today, I believe that our brands are robust enough and elastic enough to be able to take into account the different purchasing powers and income segments and opportunities. But if at any stage in any category, if the opportunity comes of having a recruiter brand as such, maybe we'll look at it. But as of now, I think the existing architecture seems to be working quite well.

We have the next question from Harit.

Am I audible?

Yes, please go ahead.

So I just had 3 short questions. The first one was on the rural side. If you could just help us understand which are the hero products, which seem to be part of your initial rural penetration drive. Given that your portfolio is slightly more urban-centric, it would be good to know what are the key products that are driving through that? So that's my first question.

Good question, Harit. I think there are -- it's across categories, so it's not just one category. But typically, if you look at it, the MAGGI brand and part of the MAGGI franchise, nutrition, milks and also coffee and to a limited extent, chocolates and confectionery would be the kind of main brands that are penetrating. Now across geographies, the mix could vary. Some -- the lead brand could be milks and nutrition and the follower could be MAGGI. In some geographies, it is MAGGI which is the front lead and the others follow. But typically, we try and see that we have a bouquet across the portfolio of the company, that gets represented rather than just focusing on one brand because then it is a very fickle distribution model that something happens to that brand and something happens to that price point, suddenly, you find that your distribution becomes unviable. So it's really like having a human being standing on 2 legs or like a tripod being a little bit more firm on the ground. It's the same thing that we're doing in terms of putting in particular SKUs from categories to form a basket and taking that basket with the infrastructure, with the activation, with the distribution support into these geographies. And that is what we are seeing is working for us.

Got it. Very clear, sir. The second thing was one of the reasons to keep petcare out was also that there was a skepticism about the same supply chain and distribution infrastructure for your existing portfolio versus petcare and the optics of it, et cetera. Do you think that has changed also given the fact that this category is slightly more acceptable? Or if anything has changed on that side?

I think it is a question of the perception at that point in time, and there was, of course, some feedback saying that, look, they would not like to keep it. But we noticed today, for example, in modern stores, you will have petcare products and next to that you will have other human products as well. There is not any critical, either contamination or any kind of issues on that. And therefore, we took a more pragmatic view saying that there is no -- apart from a sentiment issue and that sentiment issue will always be there. Somebody will say, look, I like it, somebody I don't like it. But you can't [ jump ] distribution opportunities and brand opportunities simply because there is a particular perception in a particular direction. So that's really what we have viewed and then [Technical Difficulty] that's what we thought and it's probably not true.

Great. My last question was on dairy. So this quarter, you mentioned dairy nutrition has grown in double digits. In the last couple of kind of discussions you had mentioned that dairy was having competitive pressures and that there was slower growth on account of that. So is this growth looked at more in the context of price-driven growth? Or is there any change in that dynamic?

Look, I think the competitiveness in that category continues to remain. There is nothing that has changed dramatically. What has happened during the quarter, however, is that brand Milkmaid really took off. There were opportunities of 150-year-old brands that kept at good double digits in difficult times. And that's really what will -- it showed. I think the resilience of the brand, the opportunities that it was able to capitalize on, the e-commerce salience that it received, it was able to live up to. And the overall kind of equity of the brand was something that's extremely heartening. And that's what really makes the Nestlé portfolio so exciting. We have old brands, but still very robust brands.

We have the next question from Sheela. Sheela, if you can unmute yourself and ask your question, please? Sheela, I would request you to umute.

Congratulations for bringing Gerber to India. So my first question was with respect to infant nutrition. I understand that is about 50% to 60% of your milk and nutrition business. Obviously, in recent years, the growth has been a bit tepid in this particular category. But my question to you was that are you seeing that in the last 2 years, because of the pandemic, there is a change in consumer behavior, especially with respect to flexibility to work from home for women. So do you see this as a headwind which could emerge? So that was my first question.

It's a good question, Sheela. I think -- look, I think consumer behavior has evolved over a period of time and I think to circumstances. And you're right, in terms of the pandemic, flexibility from work from home and the fact that mothers could breastfeed the child, and that is something that Nestlé actively encourages. For us, breast milk is the best food for the child if that has been enabled. But I think in a larger context, that is not necessarily a headwind of sorts because the fact is that mothers will choose when they can breastfeed and whether they need to supplement the feed with any extras that they need to give. And that's a choice that they can make and they will make, whether they work from home or whether they work from the office. So I think that bit of flexibility is there. One hasn't seen this as a sustainable behavior. So one has to watch and see as work practices settle and as workplaces of the future evolve, how this behavior translates. So at the moment, I would not be unqualified in my assertion to you that it is a headwind. I think it is -- it is something that the pandemic has seen happening, but we have to watch and see whether this is a sustained phenomenon over a period of time.

Sure. And my second question was, similar to the previous question, was with respect to the rural strategy. So with respect to your rurban strategy, have you modified any of your offerings to center around the rural India demand? So you said you have brought in bulk of your portfolio into rural India. But is there a modification with respect to your portfolio to make this more rural-centric with respect to the offering?

Yes, at the moment, what we have done is we've really done 3 things. Number 1 is we are focused on particular geographies. So about 12 states in the country is what the rurban thrust is being focused on. Number 2 is the infrastructure and the sales organization and the route-to-market organization has been put in place or is being put in place over a period of time. That's the second one. The third one is that the whole activation model using haats and using other rural activities have also been kickstarted. Number 4 is in each of our portfolio that I'm talking about, we have got starter packs price points, mid price packs and larger packs. So at the moment, what we have done is really choosing the relevant pack sizes for the geographies under consideration and the categories under consideration and working with it. As we move forward, there will be opportunities for customization in terms of pack sizes which we'll look at it. But its first, best and prudent to work with a portfolio that you've got and then modify it over a period of time.

So sir, while we are out of time, we still have one question from [ Shubhra ] if we can accommodate.

One question we can take. I don't want to disappoint [ Shubhra ].

[ Shubhra ], if you can please unmute yourself and go ahead with your question. [ Shubhra ], I'll have to request you to unmute yourself, please. Unfortunately, sir, it seems [ Shubhra ] is having some connection issues. We will circle back with her and [Technical Difficulty]. We are out of time, and with no further questions, sir, [Technical Difficulty] closing remarks from you.

Firstly, let me thank you all, all of you for participating this afternoon today. It's been a pleasure talking to you. I'm deeply grateful for the interest that you have in the organization, in the portfolio, in the initiatives. I'm also very heartened to hear from some of you this afternoon on your welcoming both the petcare decision and also the Gerber decision as far as Nestlé India is concerned. I also applaud your understanding of the overall business context and situation. As I said, 2 points is what I would like to leave you with. Number 1 is Nestlé is a long-term company. We are not a company that is purely governed by a short one quarter result phenomenon that we want to show, which means that we look at all the levers of growth on a sustainable basis. And for us, protecting the growth model, the engine of growth, as I called it, is extremely important in an inflationary context because this is the growth model that will be starting to get leveraged once the inflation abates a bit. And that's really what we are looking at. So the fundamental core of the company in terms of business, in terms of ECG, in terms of blood pressure, in terms of EEG or whatever else that you can look at and classify them the human being despite the pandemic continues to be healthy. The question is there will be a few headwinds. We are confident of being able to face those headwinds and to come out of it victorious as we have indeed been for the last couple of years. So thank you all very much for your time and attention. Stay safe, and thank you for participating today.

Thank you. Thank you very much, Mr. Narayanan. So now with this, we conclude the session. Thank you.