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Nestle India (NEST)
Consumer products
Impressive 4Q; margins surprise positively. Domestic sales growth of 26% led by
~17% volume growth is impressive. Gross margins expansion of 60 bps is likely due to
price increases ahead of input cost inflation (similar trends were seen in FY2008 as
well). While we continue to believe that Maggi faces product substitution risk (from
Knorr, Foodles and Yippie), the spate of new launches in Maggi indicates that
competition seems to have triggered higher activity levels in the industry, led by the
market leader. We note that this can potentially help Maggi maintain its current growth
rates by increasing the consumption points. Stock trades at 33X FY2012E; REDUCE.
Good sales growth, margins surprise positively
In 4QCY10, Nestle reported net sales of Rs16.7 bn (+24%, KIE Rs16.4 bn), EBITDA of Rs3.3 bn
(+39%, KIE Rs3.0 bn) and PAT of Rs2.2 bn (+28%, KIE Rs2.1 bn).
Domestic sales increased 26% largely on the back of volumes (~17%) – impact of pricing
growth is ~10% (price hike effected in 1HCY10 across most categories and in infant foods in
4QCY10). Exports declined 18% as the company has likely shifted capacity to meet domestic
demand (which has higher margins).
Gross margins expansion of 60 bps is likely due to price increases ahead of input cost inflation
(similar trends were seen in 2008 as well). Adjusted EBITDA margins expanded 210 bps to
19.7% due to savings in staff cost – 20 bps and other expenditure (including adspends) – 130
bps. We are surprised at the likely lower growth in adspends as the company has relaunched
Nescafe (with celebrity endorsement for the first time) and Kit Kat with a new marketing
campaign.
Key monitorable
We are surprised at the gross margin expansion as the management has indicated a
difficult input cost scenario in August 2010, (1) specific management comment that
‘cost pressures are not escalating’, (2) a good monsoon is likely to result in a flush
season for milk production and (3) liquid milk collection in Moga factory has increased
in double digits in 2QCY10 (it declined in 2QCY09). However, it had indicated in
November 2010 that input cost pressures are easing. We are (still) surprised at the
significant change in view regarding input costs in such a short span.
Our recent discussions with GSK, HUL and ITC (new entrants in noodles category)
indicates that penetration-led growth in instant noodles is accelerating. While we
continue to believe that Maggi faces product substitution risk (from Knorr and Foodles),
the spate of new launches in Maggi (four new variants) indicates that competition seems
to have triggered higher activity levels in the industry, led by the market leader. We note
that this can potentially help Maggi maintain its current growth rates by increasing the
consumption points.
Nestle is evaluating steps to unlock itself from the price-pointed strategy, however,
we would view this with caution given that in the past Nestle had attempted to increase
the retail price of its chocolate portfolio but had to subsequently roll it back due to a
slowdown in demand. Moreover, in view of higher food inflation likely hurting
incremental demand, the timing of focus on premiumisation (and not on price-pointed
packs) could hurt volumes in CY2011E.
The aggressive capex program could potentially dilute return ratios in near term.
Nestle India is planning an aggressive capex program in all categories except beverages
over the next few years. The company had indicated that it would invest Rs17 bn in
brownfield expansion (Samalkha: Rs6.5 bn, Ponda: Rs5 bn, Nanjangud: Rs4 bn and
Bicholim: Rs1.5 bn) in addition to two greenfield plans. The company indicated that it
would raise debt (domestic and foreign currency) to finance the expansion.
At 33X FY2012E, there is no room for execution risk. Retain REDUCE
We like the market opportunity for most of Nestlé’s categories, but look for better entry
points into the stock. We tweak estimates marginally, maintain REDUCE rating and maintain
TP at Rs3,100. Key risks to our rating are (1) higher-than-expected sales growth due to
distribution gains and (2) better than-expected margin expansion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nestle India (NEST)
Consumer products
Impressive 4Q; margins surprise positively. Domestic sales growth of 26% led by
~17% volume growth is impressive. Gross margins expansion of 60 bps is likely due to
price increases ahead of input cost inflation (similar trends were seen in FY2008 as
well). While we continue to believe that Maggi faces product substitution risk (from
Knorr, Foodles and Yippie), the spate of new launches in Maggi indicates that
competition seems to have triggered higher activity levels in the industry, led by the
market leader. We note that this can potentially help Maggi maintain its current growth
rates by increasing the consumption points. Stock trades at 33X FY2012E; REDUCE.
Good sales growth, margins surprise positively
In 4QCY10, Nestle reported net sales of Rs16.7 bn (+24%, KIE Rs16.4 bn), EBITDA of Rs3.3 bn
(+39%, KIE Rs3.0 bn) and PAT of Rs2.2 bn (+28%, KIE Rs2.1 bn).
Domestic sales increased 26% largely on the back of volumes (~17%) – impact of pricing
growth is ~10% (price hike effected in 1HCY10 across most categories and in infant foods in
4QCY10). Exports declined 18% as the company has likely shifted capacity to meet domestic
demand (which has higher margins).
Gross margins expansion of 60 bps is likely due to price increases ahead of input cost inflation
(similar trends were seen in 2008 as well). Adjusted EBITDA margins expanded 210 bps to
19.7% due to savings in staff cost – 20 bps and other expenditure (including adspends) – 130
bps. We are surprised at the likely lower growth in adspends as the company has relaunched
Nescafe (with celebrity endorsement for the first time) and Kit Kat with a new marketing
campaign.
Key monitorable
We are surprised at the gross margin expansion as the management has indicated a
difficult input cost scenario in August 2010, (1) specific management comment that
‘cost pressures are not escalating’, (2) a good monsoon is likely to result in a flush
season for milk production and (3) liquid milk collection in Moga factory has increased
in double digits in 2QCY10 (it declined in 2QCY09). However, it had indicated in
November 2010 that input cost pressures are easing. We are (still) surprised at the
significant change in view regarding input costs in such a short span.
Our recent discussions with GSK, HUL and ITC (new entrants in noodles category)
indicates that penetration-led growth in instant noodles is accelerating. While we
continue to believe that Maggi faces product substitution risk (from Knorr and Foodles),
the spate of new launches in Maggi (four new variants) indicates that competition seems
to have triggered higher activity levels in the industry, led by the market leader. We note
that this can potentially help Maggi maintain its current growth rates by increasing the
consumption points.
Nestle is evaluating steps to unlock itself from the price-pointed strategy, however,
we would view this with caution given that in the past Nestle had attempted to increase
the retail price of its chocolate portfolio but had to subsequently roll it back due to a
slowdown in demand. Moreover, in view of higher food inflation likely hurting
incremental demand, the timing of focus on premiumisation (and not on price-pointed
packs) could hurt volumes in CY2011E.
The aggressive capex program could potentially dilute return ratios in near term.
Nestle India is planning an aggressive capex program in all categories except beverages
over the next few years. The company had indicated that it would invest Rs17 bn in
brownfield expansion (Samalkha: Rs6.5 bn, Ponda: Rs5 bn, Nanjangud: Rs4 bn and
Bicholim: Rs1.5 bn) in addition to two greenfield plans. The company indicated that it
would raise debt (domestic and foreign currency) to finance the expansion.
At 33X FY2012E, there is no room for execution risk. Retain REDUCE
We like the market opportunity for most of Nestlé’s categories, but look for better entry
points into the stock. We tweak estimates marginally, maintain REDUCE rating and maintain
TP at Rs3,100. Key risks to our rating are (1) higher-than-expected sales growth due to
distribution gains and (2) better than-expected margin expansion.
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