Nestle India- Good Quarter; Valuations Remain an Overhang:: Citi

Visit http://indiaer.blogspot.com/ for complete details �� ��


Nestle India (NEST.BO)
Good Quarter; Valuations Remain an Overhang
 3QCY10 ahead of expectations — Nestle India reported healthy revenue growth of
~26% Y/Y to Rs16.4bn, ~4% ahead of our forecasts, driven by the domestic
business (+28% Y/Y: price + volume). EBITDA margins contracted 60 bps Y/Y &
30bps QoQ to 19.7% on the back of lower gross margins (down 130bps Y/Y, flat
QoQ). ~20% Y/Y PAT growth to Rs2.2bn was marginally ahead of expectations.

 Near-term margin pressures — Margins are likely to be under pressure given: a)
input cost pressures (coffee, wheat, etc), b) heightened brand building – we think
ad spends are likely to remain at elevated levels, given the rising competition in
processed foods and brand investments esp. in chocolates and beverages, and c)
escalating power, fuel and distribution costs.

 Investing for the future — Mgmt has in the recent past indicated that the capex is
expected to increase as the company expands capacities over the medium term.
The progress of the new Maggi plant in Karnataka and expansion of the infant food
unit in Haryana remain on track. Press reports (ET, DNA, BS) discuss Nestlé’s
plans to set up another F&B facility in Himachal Pradesh (outlay of Rs2.5bn) &
food processing unit in Orissa (Rs5bn investment), in addition to opening a R&D
centre in Manesar (Haryana) by 2012, with an expected outlay of ~US$50m.

 Reiterate Sell (3L) — The stock has outperformed both peers and the broad
market by 7% and 10% respectively in the past year on the back of strong growth
in volumes and realizations. While Nestle is a great play on India's urban
consumption story, valuations at ~37x one year forward P/E fully reflect the growth
potential, in our view.

 Target price of Rs2910 — We revise our TP to Rs2910 (from Rs2648), as we: a)
roll forward to Mar12E from Dec11E, maintaining our 28x target P/E multiple, and
b) increase estimates by 4-6% as we tweak our domestic revenue growth, gross
margins and other SG&A costs assumptions over CY10-12E.