Nestle-Valuation more than pricing in steady earnings growth::BofA ML

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Nestle India
Valuation more than pricing in
steady earnings growth
􀂄 Sep Q profit of Rs2.2bn, up 20% yoy; 3% above our est
Sep Q continued the recovery trend in earnings growth. However, margin
pressure continues to plague with 70bp decline on higher raw material costs and
overheads. This more than offset the surprise in sales growth which benefited
from strong volume growth and price hikes. We maintain our estimate of 22%
EPS CAGR over CY10-11E on improved sales growth and possible decline in
input costs on the back of good monsoons. However, this growth is in line with
sector and does not justify the current trading multiple of 35xCY11E. Retain U/P.
Sales grow 26%; Volume growth remains strong
Nestle reported healthy domestic growth which beat our estimate by 5% on strong
volume growth and selective price hikes. Export declined on shifting of supplies to
meet domestic demand and Re appreciation. We believe there could be upside
surprise to our sales growth estimate of ~18% for CY10-11E if Nestle takes
further price hikes and consumer demand remains strong post normal monsoons.
Margin pressure continues with 70bp fall in Sep Q
Rising costs for key inputs like milk (40% of RM cost) oils and coffee continue to
hit gross margins which fell 130bp during the qtr. This pressure could ease if
Nestle is able to push milk price cuts with farmers. However, inflation in oils and
coffee looks sustainable. This could continue to hurt margins for Nestle. Also,
overheads were up 60bp due to higher A&P spends to counter rising competition
in categories like noodles with new product launches by HUL, ITC and GSK.
Expensive valuation not supported by earnings growth; U/P
Nestle at 35XCY11E P/E is the most expensive stock under our coverage at 50%
premium to FMCG sector and 40% premium to last 5-year average. This is rich as
earnings growth is trending down to be in line with sector growth. PO of Rs2350
based on 23xCY11E is at 10% disc to last 5-yr avg and in line with sector avg.