Nestle India's Chairman and Managing Director Suresh Narayanan expressed optimism about the future prospects of the company amidst the current inflationary environment. He believes that the company might be poised for volume-led growth on the back of a possibly lower inflation.

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In an exclusive interview with CNBC-TV18, he also acknowledges the uncertainty around inflation, emphasizing the importance of its moderation for the company's performance. If inflation indeed moderates, Nestle India aims to achieve volume growth in the range of 7-8 percent, which aligns with the market's underlying expectations and trends. The focus on volume-led growth indicates the company's strategy to boost sales and expand its market presence in the face of economic challenges related to inflation.

Below are the excerpts of the interview.

Q: In the immediate term, in terms of volume growth what is the expectation given the environment and what is the aspirational volume growth target?

A: Let me just set the context. The track record once followed doesn't make a summer. In the same way, it is not one quarter or two quarter that determines the performance track record and the consistencies that I have talked about. In the last 26 quarters, 21 quarters have been double-digit growth. In that, almost 15 out of the 26 quarters have been quarters of double-digit profit growth.

The return on equity of the company is close to 100 percent. The innovation rate has been clicking at over 5 percent of sales. The infrastructure, the brands, the digital connect, the analytics and digitisation programs of the company have been extremely strong. If you look at the last six quarters itself, we have had an average organic growth of about 15 percent and a volume and mix growth put together of about 6 quarters itself, we have hired an average organic growth of about 15 percent.

The seven-year track record of the company shows an organic growth of close to 11 percent and an underlying volume growth of 7 percent to 8 percent. So, therefore, penetration led volume growth has been the core strategy of the company. I can only tell you that going forward, this strategy remains relevant, remains consistent to our competitiveness, and remains the core mantra that we will be using to grow this company, for which new capital investments, new investments in brands, and investments in people infrastructure, are all being done. So I can only tell you that I think we are hopefully now coming out into a period of slightly less inflation than what we have seen and hopefully sets the ground for better volume-led growth.

Q: If I could ask you to quantify that for us, you said that the environment as far as inflation is concerned is looking better and we are coming off decadal high inflation that we saw in 2022 particularly. What could that mean in terms of volume growth, if you can quantify that on the back of what you have just articulated for us?

A: If you look at 2022 results, the company grew by about 14 percent in turnover terms. In that 14 percent, about 10 percent was organic growth, value growth, and about 4 percent was volume growth. The trend for the company was about 7-8 percent volume growth, which in a period of high inflation and you will recall that 2022 saw unprecedented inflation. The inflation of 2019, 2020, and 2021 was less than the inflation in 2022. So in 2022, we had a 10 percent organic growth and a 4 percent volume growth. Going forward, as the first half of this year, we have had about 4-5 percent volume growth and mixed growth coming in.

Going forward if the inflation moderates, and there is a big ‘if’ to that, the volume growth would get back into the trend line for the company, which is the 7-8 percent volume growth that we have seen. That's what the expectation and the underlying kind of rhythm of the market dictates.

Q: Let me now address the four P's - portfolio penetration, premiumisation and pricing, you give us some indication of penetration. But let us start by talking about portfolio. In the last seven years, you have seen a launch of about over 100 products, new products 110 to be specific. What can we expect now in terms of portfolio, what is the trajectory that we should expect and what will be the points of emphasis within the portfolio?

A: I think this question needs to be understood from the point of view of the consumer trend, because after all portfolio is determined also by the consumer trends in the market. There are three broad trends that one is seeing in the market. One is a strong trend towards premiumisation of brands. So, consumers are trending up in terms of certain categories, brands and certain preferences. Secondly, there is a strong preference for brands which have got high quality, safety and nutrition embedded in those categories. And the third, in a situation of still continuing economic stress of some sort or the other, there is a play also on the mainstream and on the price points. Nestle operates in all these three spaces. So, I am seeing premiumisation happening across the portfolio. So all categories of the company, the four core categories of the company are going to see a premiumisation thrust.

As far as price points are concerned still, our portfolio has about a third of the portfolio, which is price point lead, which will continue to be astutely managed by a combination of cost efficiencies, recipe efficiencies and pricing. And finally, we will also be looking at getting into some new categories in order to establish the new pillars of growth.

As I speak to you, apart from the 110 odd products that have been launched, which you just referred to, there are about 30 odd projects, which are on the anvil in terms of new products and new categories, about 10 new product launches have already happened in 2023 in the first half. More to come. So, really, one is complementing this with an increasing proclivity of small town India or Bharat as I call it, moving towards our brands. So whether it is a tier-2 towns to tier-2 towns or in the rural markets, this is the time one is seeing that they are actually adopting our brands.

So, a few years ago, if I were to visit a rural market, let us say in UP or in Madhya Pradesh or any of these states, I would have found at best two or three SKUs of the company on the shelf. Today I find 10 or 15, with the improvement in infrastructure which has been undertaken by the government.

I think distribution has become much smoother, access has become much smoother. With the with the digital revolution and the and the consumption of data and India being number one on data now, the aspiration seeks availability and that is really part of the core of the rural strategy that we are looking at as a company. So consumer trends together with an increasing adoption of brands in small town, India and Bharat is probably what is going to propel the growth of this company forward.

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Q: If I could pick up on the health science division that you just spoke of and which includes supplements, weight management products, what could the revenue contribution be over the next few years from the health sciences division because that is clearly a growth engine that you intend to bet on?

A: I would look at it for the next 5-10 years because these are products that take some time to build-up. There are different products in the category and it is a category which is relatively slow burn, it will not be a huge revenue spinner for the company going forward. However in the next 5-10 year horizon, I see these businesses contributing anywhere between 2-5 percent of business and that would be a good milestone as far as these businesses are concerned.

More importantly they reinforce the nutrition credentials and the scientific credentials of the company and that has a halo effect on the entire portfolio. So that to me is the more exciting proposition which is important in these categories.

Q: Let us talk about the main stay for the business which includes milk and nutrition and does that portfolio continue to give you cause for concern? You have in your commentary articulated that there is some degree of stability now when it comes to milk pricing, but in terms of where you see this being built out over the next few years — concerns as well as opportunities here?

A: Food inflation continues to be a cause of concern. If you look at it point to point, wheat prices still are a matter of concern, milk prices while they are stable, there are still structural issues that impede the price of milk to come down substantially.

The other commodities as well, coffee for example in the last two years is up by almost 50-60 percent. So the spectre of food inflation continues and I am not talking here about tomatoes, chili and spices etc which have the impact of both climate change, uneven distribution of the monsoon and the looming impact of El-Nino. So all of this is clearly going to have inflationary impact on the organisation.

Nevertheless, I think it is fair to say that in the last five quarters milk and nutrition is also the beneficiary of double digit growth and it is about 40 percent of our business. If I am delivering 15-20 percent growth, it cannot just come out of selling more coffee and noodles, it has to come out of the core business of the company which is milk and nutrition as well. So we can have some temporary wobbles in this, but longer term, the category continues to be promising and continues to be a vibrant, robust and sustained source for growth for the company.

Q: Let us talk about your capex plans. You had announced a Rs 5,000 crore capex investment starting 2022 and running through 2025. You have just announced setting up a new facility in the state of Odisha which will mark the 10th Nestle plant in India. Given the engines of growth that you spoke about as well as demand visibility, what can we expect in terms of capex from hereon?

A: Till 2020 the company had spent about Rs 7,000-8,000 crore from the time of its inception. So in about 60 years, we had spent about 7,000-8,000 crore. 2020 till first half of 2023, we have already spent about Rs 2,130 crore in capacity expansion.

There are two kind of capex which we do. One is capacity creation and the other is compliance related. So while compliance related also happens in terms of energy sources, in terms of safety compliances and other structural compliance, the majority of this has been capacity creation. From the first half of 2023 till 2025 another Rs 4,130 is being invested. So in all, over Rs 6,000 crore of investment is coming on. About a third of this investment is in terms of prepared dishes category, about a third is in chocolates and confectionaries and the rest of it is in nutrition and coffee.

So, penetration led volume growth, leading to a strong demand that we see not just from large metros and mega cities but also from Bharat is leading to the strong capacity creation and the confidence in India and the make in India plan that we have as a company. 98-99 percent of what I sell in India is made in India. The Odisha plant once again will be resonant with the same theme and again resonant with the theme that we had in Sanand which is that it will be a majority women operated factory, it will be environmentally friendly, it will be digitally connected and it will be the most tech savvy facility that we can have and become a pride of place not just in Nestle but also something that can be an example for other food processing companies and in fact in the vicinity of other states as well.

So I am looking at it with enormous hope and aspiration and this strong plan is going to help us to cement some of this going forward.

Q: You spoke about efficiency, you spoke about capacity creation as well. In 2022 you saved about 1.5 percent of your sales through various measures that the company adopted. Now with large scale digitisation, new plants coming onboard, the volume growth that you foresee, where else can we see savings accrue and what could that potentially amount to?

A: One of the amazing capabilities of my team which I am extremely proud of is the fact that they are able to come up with saving potentials and saving actuals every single year. In 2022, 1,100 projects were put together in this company. It is a significant milestone of number of projects, small and large to generate a saving of 1.5-2 percent of NNS.

In 2023, the same journey continues. It is a journey of cost efficiency, of cost rationalisation, efficiency improvement, digital led operations, greater mechanisation as far as our capabilities and plants are concerned. So for the last 10-12 years this program has run in the company and it has delivered results of anywhere between 1-2 percent of sales every single year. I think it is a tribute to my team that they find it all across the value chain and indeed this is what keeps us going. Otherwise with the inflation around us and with the cost escalation around us it is very difficult to run a sustainable profitable business.

Q: Speaking of change as well as the opportunity for growth, let us talk about the inorganic opportunities for growth. You have taken a bite into the pet food business, courtesy in the acquisition, you have also got into the D2C space now courtesy Gerber, what next as far as acquisitions are concerned? How much appetite do you have for M&A, what about Ching's?

A: Let me be very categorical with you. There is no proposal at the moment in front of the board. So therefore much as you might try to extract some answer from me that is the plain and simple truth that there is no proposal in front of the board. Inorganic opportunities continue to excite us, it continues to play in our space. You know that all that we have achieved of 17,000 crore odd last year and more this year has been on completely organic growth.

We are hungry for it and there is enormous support from the parent as well in making acquisitions in India and let us watch this space.

Q: When you say you are hungry for it, I know you said that there is nothing on the table as a formal proposal for the board to take up. But what are the categories that you would be most hungry to get a bigger bite off?

A: Look at any category. I think the three principles that we use for M&A is very clear. Number one is that it should be in the area of business that we operate in or we are familiar with, that is number one. Number two is as a result of synergies, we should be able to bring something to the table. It's not just empty calories that we just add on a turnover and feel happy about it. Size alone doesn't matter, it is also the value that we bring to the table.

And third and very importantly, it is also the cultural fit and the competitive fit of the of the target company with Nestle. So these are the three primary criteria and the fourth one of course is so long as it doesn't dilute the overall value creation of the company significantly or in fact, in some cases, possibly even accretive to the company that would be a good thing as well. But these are the three or four criteria that we use quite transparently and this is the criteria that we are working with.

So the fork and spoon is ready, the napkin is ready, the dishes in front of me and I do hope that, that we make something happen.

Q: I want to pick up on, on how you started your AGM speech in 2022 and you said you quoted Rabindranath Tagore and you said, ‘Let me not pray to be sheltered from dangers but be fearless when facing them’. Outside of inflation what would be the key risk, what would be the key dangers that you face today? I will also ask you this in the context of the social media onslaught that many companies in the FMCG space are faced with, also possible regulatory changes that could be perhaps on the anvil? What do you make of those possible risks and dangers? What are the dangers on your dashboard?

A: I would not put it as dangerous, but what are the things that concern me the most. Number one is to live the purpose and values of the company every single day. This is an ethical honest company where hard work, dedication, where humility matters, where diversity matters, where inclusion matters. And I hope to helm a company where this means something to everyone each and every day, because we are in very sensitive categories. And we are in a category like foods where if you, if you trip even once it can be a very, very serious consequence for the company. That is one.

The second one is I think we are having a very refreshing, I must say change in the fabric of Nestle in terms of people. Today, almost 75 to 80 percent of Nestle India are millennials and generation Z. These are young bright people who are coming in with a sense of purpose, determination and drive. And it is my hope and it is by prayer that as a leadership, we are able to inspire these people so that they contribute to and stay on in the company and work for the company. So talent is the second important part.

And the third important part is to ensure that the ecosystem of the company. Remember that Nestle is not alone. We have thousands of suppliers and farmers and distributors and dealers all across this to ensure that compliance is centrepiece of the business model that they follow. That is my big concern and that is what I really work on. So it is my hope and prayer that we continue on all these three because the credibility of the brands, the strength of the brands, the resonance of the opportunities are all there in front of us. It is for us to seize the moment and to really go beyond what we think we are capable of and therefore my role as a leader is more as a medium. Leaders can be of three types.

One leader is what I call the step-up transformer, the person who can really step-up the transformer of the corporation, some others allow the electricity and energy to flow through and some others short circuit, the company. I only hope that none of my actions will ever short circuit this great organisation.

Q: Well, that certainly hasn't been the case over the last almost eight years that you've been at the helm. But let me very quickly end by asking you, your royalty contract comes up for renewal in 2024, 4.5 percent of revenue currently. Do you foresee any possibility of that changing either higher or lower?

A: Look, I think it's premature for me to comment on the subject. I think it's fair to say that this is a matter that the board is seized of and in fact, we will have discussions with the Nestle India board on the entire royalty issue and what is the nature of it and how important it is and what should be the final number.

Needless to add, I think Nestle SA continues to play a very strong and pivotal role in the technology in the capabilities and in the brand for Nestle India. But this is something that should not agitate anyone because whatever will be done will be done fairly, which will be done in the interest of not just the stakeholders but also the interests of the minority shareholders.