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Nestlé India Limited
Neutral
NEST.BO, NEST IN
Volume acceleration drives a strong Q3CY10
• Good earnings performance. Nestle India reported net sales, EBITDA and
adjusted PAT of Rs16.3bn (+26% y/y), Rs3.2bn (+22% y/y) and Rs2.2bn
(+22% y/y) for Q3CY10. While revenue growth was 5% higher than our
estimates, EBITDA and PAT came in 4% ahead of our expectations.
• Strong domestic sales growth at 28% y/y, which is largely volume-led
and supported by particularly strong growth for its prepared dishes portfolio
(under brand Maggi). Management remains focused on increasing
distribution reach and growing consumer penetration by enhancing product
affordability (introducing low unit packs). Further innovation and
renovation remain the key pillars of company’s growth strategy. Company
is scaling up its capacities to meet the growing demand and is in process of
setting up a new plant for prepared dishes in Karnataka and a unit of Infant
Nutrition plant in Haryana.
• Export sales dip 3% y/y due to diversion of capacity to domestic demand
(reflected in higher domestic sales growth), timing difference and currency
appreciation.
• Higher input costs and brand spends led to 60bp y/y decline in EBITDA
margins, despite moderate y/y increase in staff costs. In ensuing quarters we
expect mixed trends for raw materials, with some of the agri-commodity
costs like milk, and sugar likely to ease with a better monsoon, and some
like palm oil and packaging costs (crude based) remaining firm. Important to
note is that base comps will become favorable starting Q4CY10. However,
we expect A&P spends to remain at elevated levels on account of new
product/variant launches across product segments and also in response to
increased competitive levels particularly in instant noodles and
confectionery space.
• Valuations offer little room for upside potential: While we remain
positive on the company's mid/long-term growth outlook and believe it is
amongst the best plays on fast-growing high potential processed foods
segment in India, we think current high valuations of 32x FY11E will
constrain stock performance. Retain Neutral
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