Nestlé India
We downgrade Nestlé from Overweight to Neutral due to high valuations, possible downside risk to
our EPS estimate and increased competition in the long term.
Nestlé currently trades at c31x one-year forward EPS on our estimates, which is close to peak multiple –
the multiple on consensus estimates is even higher. This is the main reason we downgrade Nestlé to
Neutral. Another reason was that there could be a downside risk to our EPS estimates. Our EPS estimates
for CY10/11 are 10%/5% above consensus estimates as we believe that Nestlé will benefit from lower
milk prices due to a good monsoon. However, there is a risk that the quantum of benefit may be lower
than our estimate, or may come with a lag.
Lastly, competition is increasing for Nestlé, notably in the noodles segment, with new products such as
Horlicks Foodles and Soupy Noodles being launched. While these will take time to become significant
enough to pose a threat to Nestlé, we believe it could affect the long-term growth prospects. We like the
company but currently the stock is fairly priced, in our view. There are no obvious triggers for correction
that we identify, but we believe it may be worth waiting for a more reasonable price to enter. We
downgrade from Overweight to Neutral.
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