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, 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 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 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 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 Nestlé 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 Microsoft Teams.
Once you have raised hands during the Q&A session, my team will enable your mic when you are 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 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.
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. 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 securely and more dynamically.
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 seven years ago, the strategy that was enunciated by the company was penetration-led volume growth. If there is no penetration, there is no volume. If there is volume, there's no growth. If 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 meant one 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.
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, and really giving a bouquet of variety, nutrition, and 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 a 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. Finally, we talked about them, which have exacerbated now, immediate concerns on inflation while the long-term road looked promising.
These were the eight 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. The results have just been declared, a couple of hours back today, as you know. I'll be 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 power the engine as we move forward.
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 the
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. That clearly has had a small dent as far as our profits are concerned. Our profit from operations have come down in the first half by about 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 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 zero. If you have zero growth, you can have the highest margins, and yet you'll have a rather putrid result. 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. As you know very well, Nestlé is a long-term company. We are not a short-term company. We are not here for a quarter. We've been here for over a 100 years.
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 five 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. 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 this stops, ladies and gentlemen, is the day that we will have trouble with our growth model. 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 2017-2022 period, 9.7%. To 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 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 Q1 to Q2 2022 on domestic sales on a sequential basis. You will see that going up from 10.2% to 16.4%.
If you look at the volume pace 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%. You can see that on a high base, there has been a high result. We have not had any benefit of low base effect to give us our sales growth. It has been on a high base, and we have also grown quite handsomely, ladies and gentlemen. What is heartening is to know not just that the human being is healthy overall, but how strong is his ECG. An 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 may not be entirely out of the country, we still have built a mechanism to cope with it, and certainly in mega cities that's happened.
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-4 million population.
Once again, the growth numbers are in 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 rural strategy. The question you asked me was that this company is an urban company, what is it doing in semi-urban and rural markets? We 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 lakhs population. They are growing also handsomely by double digit. Town Class 2 to 6, which is really below 1 lakh population. The small town India or Bharat, as we call it, also growing handsomely in double digit.
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 70,000-80,000 of these villages. We are seeing the uptick happen in terms of our sales. 9%, 15%, 13.7%. Rural indeed will be an engine of growth. If we continue with the good monsoon this year, as is the hope, then we can look forward to not just an exacerbation of some of the commodity costs, hopefully, but also look at a demand generation that will be fairly encouraging as far as the company is concerned.
The overall growth, 13.3% first half, 6.3% on pricing, 7% on volume. Town category-wise, mega, metros, town class one, two to six, and villages all on double-digit growth. That's the bottom line for our Q2 performance. 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. 2018-2020, if you look at the CAGR of commodity inflation, 3%. 2021, 5%. 2022, 15%. 5x of the CAGR in the preceding period. Now, there are two ways in which a company can tackle it. One way is to take indiscriminate price increases.
Yes, remember that in 8 out of the 10 categories, Nestlé is a market leader by far. The hubris of market shares start to work against you when you indiscriminately take price increases in order to mitigate the situation. Wiser counsel and a wiser management goes towards balancing pricing, balancing margin expectations, and retaining the kernel of growth that is required for the future. Out of this 15%, if you look at the Q2 , about 8.5% was the kind of pricing impact that we took. Q2 , 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.
The day 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 hollowed out and that is getting eaten from within, and that's not a good situation to be in. Therefore, if you look at the 5x impact on commodities, clearly it has had a short-term impact on our profit from operations. Despite the fact that in the five-year period, it has grown by 11.2%. Despite that, there has been a short-term impact. 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 I put a caveat 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, wheat, grains, and green coffee are expected to remain firm. As you saw in the papers today, wheat is reaching all-time high prices because of the low stocks that we're holding as a country, but also because of the as yet question mark on the quality of the monsoons. This has been a short-term impact that we have faced. 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 the vagaries that we have faced. Let's look at the texture of performance. I talked about the ECG of performance. Let me look at some more of the other vital indicators of growth. Our four major categories: Milk Products and Nutrition, Prepared Dishes and Cooking Aids, Confectionery, and Powdered and Liquid Beverages. First half growth, as I mentioned, 13.3%. Milk Products and Nutrition has grown by 7.2%. Once again, we've had 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 at 24.4%. The 80-year-old brand like KitKat is growing strong double digits as is Munch as is rest of the portfolio. Nescafé and associated brands and the portfolio growing very strongly at 21.7%. 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 that comes from innovations and renovations that have been put through during this period. I would, however, like to add that during this period, the focus has been on the core.
It's important that when you 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 the organization, and these four categories are the core of the organization. Therefore, we have protected the core, and we have also done innovation. Almost 100 new products have been launched in the last five 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 26th July price, you would see that our annual return is close to 20%.
We have all outperformed the FMCG benchmark index quite significantly, and today we enjoy a market capitalization of almost $23 billion-$24 billion. A price-earnings that is salutary. I want to thank you all for the confidence you place 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 two specific engines that we are looking at for the future acceleration of this company. The first one is Purina Petcare.
Many of you will be having pets. Some of you might own pets in the future. One thing you all know about pets is that 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 are even more unhappy when your dog does not wag his tail and does not come to you with happiness and joy. We know that a lot of that has to do not just with how you treat the pet, but also what kind of food you give the pet. Here is a happy dog. It's a happy dog face because pet care 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 we've got amongst all, if you can call it a consumer good. It's a consumer good because pets and are also consumers for us.
Pet adoption is on the rise, especially post the pandemic. I think the vagaries of the pandemic, the travails 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. There are about 3 million pets getting added 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. What is very interesting is the wet cat food is also a strong opportunity. Wet cat food is growing at 35%. So a 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 phenomenon, 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? That's something I would like to briefly 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 had taken a view at that stage that this was not an area of expertise for the company, 'cause we don't sell anything to pet shops. None of our mainstream brands go to pet shops. This is where the market was, and the market has evolved. We have nurtured this category with expertise.
70% of the sales team have got pet care sales experience or marketing experience or supply chain experience of four years-plus. We built a cadre of people who understand pet care. The growth has accelerated 68% in 2021, 51% in H1 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 omni-channel, with e-commerce today contributing about 14% of sales. There is a multi-channel and omni-channel approach that is coming in pet care that is quite significant. We are market leaders in pet care worldwide. It's one of our strongest businesses.
Purina has invested for about 90 years, an army of over 500 scientists, nutritionists, and pioneered some of the first in the category, including the first extruded pet food. Why do I say this? Like all our categories, there is a domain expertise in this category. 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 in this. We've got science and technology and heft and R&D centers and factories and people who are focused on this area. It's a growing category, and it's a promising category. Global investment in Purina Petcare. Remember, the first entry was done by Nestlé S.A.'s wholly owned subsidiary, Purina PetCare India.
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." That's what they did and invested about INR 126 crore in this business. Finally, we noticed a lot of opportunity, synergy, and leveraging the heft of the company. The Nestlé India network would further accelerate both organized trade, quick commerce, and Tier One and Tier Two towns. This has been the evolution in the last four years. What has been the strategy of the 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.
I'm delighted to inform you that Supercoat, which is the lead brand of pet food, pet dry dog food that we sell, has been voted the 2021 Product of the Year. That means that this has got the accolade 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 pet care business in this country.
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. It makes sense for Nestlé India to take on the business at a stage that 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 crore, INR 11.5 crore. It closed 2021 at INR 31 crore. It will be closing this year, hopefully, at INR 46 crore, if not a little bit higher. We have built in this time 46 towns with 50 distributors, as far as the specialist channel is concerned.
185 suppliers spread all across the country. The infrastructure, the bedrock, the ecosystem has been created for this business. Today, we depend on imports, but a lot will depend on the evolution of this business going forward. 2 factories, Amata in Thailand, that gives us Supercoat and Friskies, and Blayney in Australia, that gives us brand Pro Plan. 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 has got a product meant for puppies with colostrum, which is the best and the most celebrated product in the Pro Plan range. It is a super-premium product, but it is the best for your puppies.
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, and super premium Wet Cat under Fancy Feast. These are the products that we will be marketing, and we'll be supporting in the country. You say that, you said something in 2018, and you said the same something in 2020. Let me put it. No, I've been transparent in devising. I've not hidden anything from what we thought and what we are doing today.
I think a hallmark of trust and transparency for an organization is the capability and the shedding 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 pet care as a category is still evolving in India. Little realizing that it'll accelerate the way it is accelerating. Today it has become an exciting future with adoption on the rise post-pandemic. Clearly, there's an opportunity here and there is a bend in the Ganges that has happened here that is significant. We looked at it, no synergy with 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. That is, to the best of my knowledge. There are far greater synergies with evolution in channel strategy today. Leveraging Nestlé India network would accelerate the growth even further. Finally, limited route to market and category marketing expertise, which we have invested in and built.
Remember, the money that Nestlé S.A. has put behind this business is to build this expertise in the context of the market. 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 a growth driver in the future of Nestlé India. That's really what is being proposed.
You're seeing 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 two colleagues, David McDaniel and Matthias Lohner, have abstained from the voting on this proposition completely because that is what the board governance is all about. We have kept it completely and totally transparent and clear in terms of the direction that we want to take on this business. That's one part of the business. That's the exciting part. I'm sure the dogs and cats will say even more today. 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've been a little tongue-in-cheek, I know this, but I take this liberty with you guys because I've known you for a long time. Always, one of the phrases that has been quoted to me has been, M&N and nutrition makes a pillar of business. It's a boring business." I just want to tell you, ladies and gentlemen, 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. That's really what we are looking at today. Remember that 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 take on their lives.
They are toddlers in 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 will 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 four words that have become most common in usage post-pandemic, and I think it's becoming more and more important as you go forward. 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 the world well before the personalization of services was becoming an essential element of brands and propositions, Dottie had been put by Gerber as a personalized expert. Of course, in 2022, we launched Gerber in India. 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 your toddlers. It is meant for your toddlers. Our range of Powerblend cereal has been developed for Indian toddlers, combining the benefits of four diverse groups, cereals, legumes, milks, fruits, vegetables with age-appropriate fortification to offer. It's a nutritious, healthy, and tasty product. Gerber cereals with Powerblend, anything that he wants.
Because remember that for us, our children are extremely important, and their health and well-being is the center of our lives. This is what it is. It is a 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 and health. This is a brand that has got equity at its center. What is the promise that it offers? It talks about immunity and not communication.
This is not just a brand that puts out pieces of communication and television 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, and in the health and well-being of their children. We are also having the ambition in this brand for co-creation. 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, to tell you a bit about sustainability.
We promise to collect and responsibly manage equivalent quantity of plastic created by our products. 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. To just give you an idea, and I've been talking about premium, just 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 we're talking about in this brand. There is a significant element of premiumization that we're talking about because this is what nutrition, science, technology, and expertise brings together in these products. 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. Remember, once again, 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 important. The robustness of the growth engine is what we would like to continue. Securing growth, as 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 will 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 in on our faces when we 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 had. We're talking here of not insubstantial, but 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.
It's our brand equity that is able to sustain us over a period of time. 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. 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. I would request you all to please exercise the raise hands options on Microsoft Teams. Yes, we have. We are starting to get the questions. We have the first question from Abneesh sir. Abneesh, please go ahead. You will need to unmute yourself first.
How do I do it?
Yeah, Abneesh, we can hear you.
Am I audible?
Yes, Abneesh, please go ahead.
Thanks. Firstly, congrats on numbers, and Purina and Gerber. My first question is on Gerber. You have mentioned INR 3,500 crore market size. I want to understand who are the key players here. Second is targeting 2-6 age bracket not easy given 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 700-index pricing versus Maggi at 100, why not look at a more affordable option? These are the key questions on Gerber.
Thank you, Abneesh. Thank you as always for your sharp questions. I think, you know, when I talk about the segment size being INR 3,500 crore, it is really a motley of different kind of product categories that come into this. There are snacks, there are healthy snacks, there are bit of biscuits, there are cereals. All this put together in our estimate is about INR 3,500 crore. There are a few players, a few small players and a few credible players who are there in this space. What, however, is different, and I'm not here to either make the case or to decry the case or what Horlicks might feel on a particular opportunity.
This brings the power of nutrition, customization, clean labels, sustainability, and a highest quality that mothers can get for their toddlers in terms of nutrition. It's not a contest. We have got brands, for example, we've got a brand called Cerelac, 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 toddler 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 child. We are not here talking about a milk modifier, or we are not talking here about another chocolate flavor or a vanilla flavor or something else that we can offer. This is serious nutrition, and serious nutrition is serious business.
That's the reason why we are confident about this. Now, how this will be born? Obviously, it is gonna compete with a lot of other product categories. 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 know, Abneesh, quite a few, and I know quite a few, who are genuinely interested in the quality of nutrition, would re-read every label, and who figure out every ingredient that there is on the packet, 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 else. I'm launching a nutrition product. I'm more than
Thank you, Abneesh. We have the next question from Shirish. Or Ravneet, do you have? Yeah. Shirish, you may please go ahead.
It was very impressive presentation. 2 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 of 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? Second, on the related question, in the prepared dishes, we have a good benefit from Sanand factory.
Just question on Sanand, how much is the capacity utilization at this point of time? My second question on Purina. If 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 is being 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?
Okay, 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 downgrading or pulling 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 or our popularly priced portfolio, which is not an insignificant part of our portfolio, in terms of the headwinds of commodity vagaries that we faced. 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 predictive model that says, "Look, taking a price of 6% could have been optimized at 8% or 10%." There is always a price to pay for this.
You know, we’ve got a fairly sophisticated decision-making models within the company using a lot 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 the 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. You know, I mean, we can 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.
Time will tell, but I think we are reasonably secure, and you're seeing this. A 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. 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 in 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. I believe that with our distribution muscle that we have across cities and taking it into tier one and tier two towns, we will be able to get much stronger growth. Really it is leveraging what Purina Petcare has built up and leveraging the distribution heft that we enjoy as a company.
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 five years for itself to build on. Therefore, I think the logic has come to where it is.
Yeah. Thank you, Suresh. That's wonderful. All the best to you and the team.
Thank you. Thank you, Shirish.
Thank you, Shirish. We have the next question from Arnab. Arnab, please go ahead. Arnab, you're not audible right now. I think we'll circle back with Arnab. Mangalam, why don't you go ahead with your question in the meantime?
All right. Well, thank you so much for the opportunity. 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're 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. With all these things, what does the margin trajectory of the company look like in the near, medium, and the long term? That's question one. Secondly , a lot of categories are 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. In light of that, is Nestlé looking at this health food sort of thing with snack bars, proteins, et cetera, vitamin, the additive, nutrition stacking 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 will be looking at. I think we have a certain expertise there. It'll 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, by 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 meat is concerned and cereals is concerned. How this overall kind of mix will work out in the future, time will tell.
At least one thing I can assure you, Mangalam, that we have a growth model in place, that is reasonably secure for the time being. I think that is going to be important for how-
And that-
I think you know, this is the point that Abneesh also made. I mean, the fact is that commodity headwinds are remaining for a while, so it doesn't mean that suddenly margins will become magical as you go forward. We'll have to live through this for a while. I can't tell you what percentage and what will happen. 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. 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.
Yeah. 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, a lower base in rural markets, and I think we have accelerated our rural strategy that is beginning to click. 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. You know, 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 Q3, Q4 , together with infrastructure and together with 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.
Thank you. Thank you so much.
Thank you.
Thank you, Mangalam. Tejas, the next question is from you. Please go ahead.
Yeah. Hi. Hi, sir. Thanks for the opportunity and very detailed presentation as always. 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, Tejas. I think that endeavor remains. B ut let me make one thing clear. Export for us is a sourcing opportunity. Therefore it , 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. Also, of course, sourcing opportunities of brands to particular affiliates of ours across the world. These are the two 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 Q2 .
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. I think we are coming across reasonably good traction. Let me put it fair and square. I think the opportunity is primarily for portfolio that is relevant to the Indian diaspora that we'll be dialing up. It'll not be. For example, you can't expect me to export, let's say, Nescafé to the United States of America, because the fact is that they have coffee brands. You know, they don't need to buy my coffee brands. Am I selling more of Maggi Noodles?
Am I selling more of, Maggi sauces? The answer is yes, because they have a number of, Indian origin people who stay there in the U.S., and they'd be happy to consume these brands that they know from back home.
Sure. That's very helpful. Second and last question on the new categories that we have entered today. We always had an option to enter in some of these categories in past also, but very rightly, you would have waited for market also to be ready for this, and you shared some of the category numbers. From your global experience, is there any per capita income threshold where the inflection point for some of these categories actually come through? 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 in numbers?
I think in India, the per capita income becomes a little bit tenuous because the fact is, Tejas, 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. Really it's very difficult for me to put a per capita income and say, "Look, this is what it'll do." What is happening in these categories, pet care, the INR 30 billion pet ownership is largely amongst the middle and upper middle segments of the population. You really don't have too many poor people owning a lot of pets. Those pets are probably out, eating something else.
The fact is that it is that segment, and that segment is growing pretty well. I mean, you'll know from your own experience, Tejas, that today, pet care, you've got pet salons and pet care 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. Even though the pet care nutrition coverage is relatively small. It's just about 5%, because people still believe that the pet should be given the paratha from the table. 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.
I think it is that segment that we appeal to, and this is a fairly large segment. 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, a dog has to be taken out for a walk and , in small apartments that's very difficult. But cats kind of take care of themselves, I believe. Therefore, there is an opportunity there for people who own cats to give them not only Friskies, but also the Fancy Feast as well. That's on pet care. On the toddler segment, again, remember what I talked about, Tejas. I talked about aware mothers, I talked about achieving mothers. I talked about really speaking SEC A and maybe part of SEC B kind of profile.
I'm not talking here about the mother who's struggling with her budget. I'm talking here about a mother who can afford to give her child the best that nutrition can buy. Therefore, in that context, the premiumization is what we're looking at. You see this across segments. I mean, some of our premium brands are doing extremely well. You would think that, look, in a post-pandemic context, you'll have all of these things doing particularly miserably, but they're not. They're doing fairly well. 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 pet care, there is a domain expertise that we have got in this. That's what we are known worldwide for.
Yes, India is ready for it and therefore we come out with it.
Very helpful, sir. Thanks and all the best, sir.
Thanks.
Thank you, Tejas. We have the next question from DG.
Hi, sir.
Uh-huh.
Am I audible?
Yeah.
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 a what can drive it now going forward.
On a-
Sorry for that, Madhav. Thank you, sir.
On a lighter note, Avi, you know, you're finding a different way of taking the butter off the pot, as what Mangalam was saying. He was very direct to me about what was. He was asking me whether there's any back-ending of this. Look, the fact of the matter is, 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. Not just by playing the cost efficiency game, which I'm playing still today.
I mean, in all that I'm talking about, still there is an unrelenting focus on what we call sharp savings and what we call operational efficiency savings. None of that has stopped. I think my CFO is on the call, David McDaniel. I mean, he can tell you chapter and verse on the various steps that are being taken on the cost efficiency part of it. 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. One is seeing some signs of it in those, 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 sizable impact on milk and meat 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. 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, you know, in a bid to get recruitment in, you also want to ensure that the brand positioning does not take a hit. 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. Therefore. 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. I would rather leverage an architecture of brands that is little bit more all-encompassing, looking at different buyer segments and looking at different purchasing power strengths, rather than introducing intermediate brands or new brands for recruitment and new brands for upgrading and such like that. I think that luxury we don't have in a 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, income segments and opportunities. If at any stage, any category, if the opportunity comes of having a recruiter brand as such, maybe we'll look at it. As of now, I think the existing architecture seems to be working quite well.
Thank you very much, sir. That's all from my side.
Thank you, Avi. We have the next question from Harit.
Yeah. Good evening. Am I audible?
Yeah, Harit. Yes, please go ahead.
Yeah. Just had three 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, would be good to know what are the key products that are driving through that. That's my first question.
Good question, Harit. I think, you know, it's across categories, so it's not just one category. 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 then the others follow.
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 unwieldy. It's really like having a human being standing on two legs or like a tripod being a little bit more firm on the ground. It's the same thing that we are doing in terms of putting in the 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. 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 pet care out was also that, there was a skepticism about the same supply chain and distribution infrastructure for your existing portfolio versus pet care 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?
Look, Harit, I think it's 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. You know, we notice today, for example, in modern stores, you'll have pet care products, and next to that you'll have other human products as well. It is.
Yeah.
There has not been any critical either contamination or any kind of issues on that. Therefore, we took a more pragmatic view saying that, look, there is no. Apart from a sentiment issue, and that sentiment issue will always be there. Somebody will say, "I like it," somebody will say, "I don't like it.
Yeah.
You can't jump distribution opportunities and brand opportunities simply because there is a particular perception in a particular direction. That's really what it is.
Got it.
Quite honestly, that's what we thought, and it's probably not true.
Great. My last question was on dairy. You know, this quarter you mentioned dairy nutrition has grown in double digits. In the last couple of discussions, you'd mentioned that dairy was having competitive pressures and that there was a slower growth on account of that. 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. Really took off.
Okay.
You know, there are rare opportunities of 150-year-old brands that grew back at good double digits in difficult times, and that's really what Milkmaid showed. I think the resilience of the brand, the opportunities that it was able to capitalize on, the e-commerce salience that it was able to live up to, and the overall kind of equity of the brand was something that's extremely heartening. That's what really makes the Nestlé portfolio so exciting. You know, we have old brands, but still very robust brands.
Got it. Thank you. Wish you all the best. Thanks.
Thank you.
Thank you. Thank you, Harit. We have the next question from Sheela, sir.
Sheela, you can unmute yourself and ask the question, please. Sheela, I would request you to unmute. Yeah.
Thank you. Thank you for taking my questions, and congratulations for bringing Gerber to India. My first question was with respect to infant nutrition. I understand that is about 50%-60% of your milk and nutrition business. Obviously, in recent years, the growth has been a bit tepid in this particular category. My question to you was that are you seeing that in the last two years, because of the pandemic, there is a change in consumer behavior, especially, with respect to flexibility to work from home for women? Do you see this as a headwind which could emerge? That was my first question.
It's a good question, Sheela. I think consumer behaviors evolve over a period of time, and I think through circumstances. You are 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. I think in a larger context, that is not necessarily a headwind of sorts. Because the fact is that the mothers will choose when they can breastfeed and whether they need to supplement the feed with any extras that they need to give.
That's a choice that they can take, and they will make whether they work from home or whether they work from the office. 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. At the moment, I would not be unqualified in my assertion to you that it is a headwind. I think 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. My second question was similar to the previous question with respect to the rural strategy. With respect to your rural penetration strategy, have you modified any of your offerings to center around the rural India demand? You said you have brought the 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?
Yeah. At the moment what we have done is we have really done three things. Number one is we are focused on particular geographies. States in the country is what the rural thrust is being focused on. Number two 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 kick-started. Number four is in each of the portfolio that I'm talking about, we have got starter packs, price points, value packs and larger packs.
At the moment what we have done is really choosing the relevant pack sizes for the geographies under consideration and categories under consideration and working with. As we move forward, there will be opportunities for customization in terms of pack sizes, which we will look at. It's first best and prudent to work with the portfolio that you've got and then modify it over a period of time.
Understood. Thank you. That's it from me.
Thank you.
Thank you, Sheela. 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. 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'll circle back with her and get the details. We are out of time and any further questions, sir. If I can just close your remarks from you.
Firstly, let me thank you all for participating this afternoon. 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 pet care position 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, two points is what I would like to leave you with. Number one is Nestlé is a long-term company.
We are not a company that is purely governed by a short Q1 result phenomenon that we want to show. Which means that we look at all the levers of growth on a sustainable basis. 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'll be starting to get leveraged once the inflation mitigates a bit. That's really what we are looking at. 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 been being for the last couple of years. 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. With this, we conclude the session. Thank you.
Thank you.