Nestlé-Healthy performance, high valuations; -Sell: Anand Rathi

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Nestlé India
Healthy performance, high valuations; retain Sell
 Maintain Sell. Though Nestlé India is expected to maintain
healthy earnings growth, we believe the present valuations are
stretched. Hence, we retain our Sell rating, though we raise the
target price to `2,905/share from `2,416.


 Healthy revenue growth. Nestlé reported a healthy 26% revenue
growth yoy, largely led by volume and select price hikes. Domestic
revenue growth was 27.8%. Exports were down 3.4% yoy.

 Lower EBITDA margin. EBITDA margin was 60bp lower yoy.
Higher raw material prices and increase in ad spend-to-sales led to
the lower EBITDA margin. Net profit was up 22% despite the
higher income-tax rate.

 Outlook. We expect Nestlé India to report revenue and earnings
CAGR of 18% and 17% respectively over CY09-11e. Launch of
smaller SKUs and penetration of rural areas are expected to drive
revenue growth. Lower food inflation is expected to allow for
some margin expansion. However, keener competition in Maggi
noodles and chocolates is likely to lead to higher ad spend.

 Valuation and risks. We value the stock at `2,905, based on
target PE of 30x CY11e earnings, which is at a 75% premium to
the 12-month forward Nifty PE as against the average premium of
65% in the past ten years. Key risks are lower raw material prices
and a lower level of competition.