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Nestle – 4QCY2010 Result Update
Angel Broking maintains Neutral view on Nestle.
Nestle reported strong set of numbers for 4QCY2010 beating our expectation by
~7-8% on both the top-line and earnings front. While top-line grew 23.6% yoy
(largely driven by domestic volumes), earnings grew by ~80% yoy (low base
effect) and margin expanded on the back of cost rationalisation. Post the
4QCY2010 results, we have revised our earnings estimate downwards by ~2-3%
to factor in the high depreciation cost. We maintain our Neutral view on the stock.
Strong top-line boosts result, gross margins still under pressure: Nestle registered
robust top-line growth of 23.6% yoy to `1,671cr driven by steady growth in its net
domestic sales (up 26.6% yoy, supported by higher volumes and realisations).
Exports however, decline by ~17.3% yoy due to the diversion of capacity to meet
domestic demand and rupee appreciation. Earnings registered 80.1% yoy growth
on a reported basis to `203.4cr driven by margin expansion. On the operating
front, the spike in input costs (particularly milk and sugar) was managed due to
the decline in staff cost and other expenses.
Outlook and Valuation: At the CMP, Nestle is trading at ~131% premium to the
Sensex, ahead of its five-year average historical premium of ~75%. We believe
that current valuations capture full potential of near-term growth leaving no room
for any negative surprises, which could emerge from: 1) gross margin pressures
due to rising input costs, 2) competition in the high-growth noodles category from
HUL and GSKCHL, and 3) up-tick in ad-spend. We maintain our Neutral view on
the stock, with a revised Fair Value of `3,370 (`3,501) and await better entry
opportunities.
Investment Rationale
Best play on emerging growth opportunity in Foods: Nestle enjoys a strong
position across categories in the Food & Beverage space through a diversified
portfolio of established brands like Maggi, Nescafe, Everyday, Kit Kat, Milkmaid,
etc. We are particularly bullish on under-penetrated categories like instant
noodles, value-added dairy products, chocolate and confectionery, which are
witnessing an uptrend in consumer demand.
Better distribution reach, focus on LUPs and new product launches to aid growth:
There is significant focus on improving distribution reach and various LUPs (low
unit packs, ~30% of sales) have been launched across product segments aiding
strong double-digit growth in the smaller towns. Moreover, new product
launches in existing categories, entry into new categories (like breakfast cereals)
and launches from parent’s portfolio are likely to help Nestle maintain its growth
momentum.
Valuations however, at 131% premium to Sensex and captures full potential: At
the CMP, Nestle is trading at ~131% premium to the Sensex, significantly ahead
of its five-yr average historical premium at ~75%. While Nestle has been able to
maintain its premium valuations on account of strong parentage, dominant
brands, high RoEs and OPMs, we believe that current valuations capture full
potential of near-term growth leaving no room for any negative surprises, which
could emerge from: 1) gross margin pressures due to rising input costs, 2)
competition in high-growth noodles category from HUL (Knorr soupy noodles)
and GSKCHL (Horlicks Foodles), and 3) up-tick in ad-spend to battle intensifying
competition.
Outlook and Valuation
Post the 4QCY2010 result we have revised our earnings estimates for Nestle
marginally downwards by ~2–3% to factor in higher depreciation as the company
undertakes heavy capex. Management indicated commissioning of two green-field
projects, and stated it would invest ~`15-17bn in various brown-field projects.
At the CMP of `3,480, the stock is trading close to its 3-year average P/E of 28.8x
CY2012E EPS of `121. We maintain our Neutral view on the stock, with a revised
Fair Value of `3,370 (`3,501) and await better entry opportunities in the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nestle – 4QCY2010 Result Update
Nestle reported strong set of numbers for 4QCY2010 beating our expectation by
~7-8% on both the top-line and earnings front. While top-line grew 23.6% yoy
(largely driven by domestic volumes), earnings grew by ~80% yoy (low base
effect) and margin expanded on the back of cost rationalisation. Post the
4QCY2010 results, we have revised our earnings estimate downwards by ~2-3%
to factor in the high depreciation cost. We maintain our Neutral view on the stock.
Strong top-line boosts result, gross margins still under pressure: Nestle registered
robust top-line growth of 23.6% yoy to `1,671cr driven by steady growth in its net
domestic sales (up 26.6% yoy, supported by higher volumes and realisations).
Exports however, decline by ~17.3% yoy due to the diversion of capacity to meet
domestic demand and rupee appreciation. Earnings registered 80.1% yoy growth
on a reported basis to `203.4cr driven by margin expansion. On the operating
front, the spike in input costs (particularly milk and sugar) was managed due to
the decline in staff cost and other expenses.
Outlook and Valuation: At the CMP, Nestle is trading at ~131% premium to the
Sensex, ahead of its five-year average historical premium of ~75%. We believe
that current valuations capture full potential of near-term growth leaving no room
for any negative surprises, which could emerge from: 1) gross margin pressures
due to rising input costs, 2) competition in the high-growth noodles category from
HUL and GSKCHL, and 3) up-tick in ad-spend. We maintain our Neutral view on
the stock, with a revised Fair Value of `3,370 (`3,501) and await better entry
opportunities.
Investment Rationale
Best play on emerging growth opportunity in Foods: Nestle enjoys a strong
position across categories in the Food & Beverage space through a diversified
portfolio of established brands like Maggi, Nescafe, Everyday, Kit Kat, Milkmaid,
etc. We are particularly bullish on under-penetrated categories like instant
noodles, value-added dairy products, chocolate and confectionery, which are
witnessing an uptrend in consumer demand.
Better distribution reach, focus on LUPs and new product launches to aid growth:
There is significant focus on improving distribution reach and various LUPs (low
unit packs, ~30% of sales) have been launched across product segments aiding
strong double-digit growth in the smaller towns. Moreover, new product
launches in existing categories, entry into new categories (like breakfast cereals)
and launches from parent’s portfolio are likely to help Nestle maintain its growth
momentum.
Valuations however, at 131% premium to Sensex and captures full potential: At
the CMP, Nestle is trading at ~131% premium to the Sensex, significantly ahead
of its five-yr average historical premium at ~75%. While Nestle has been able to
maintain its premium valuations on account of strong parentage, dominant
brands, high RoEs and OPMs, we believe that current valuations capture full
potential of near-term growth leaving no room for any negative surprises, which
could emerge from: 1) gross margin pressures due to rising input costs, 2)
competition in high-growth noodles category from HUL (Knorr soupy noodles)
and GSKCHL (Horlicks Foodles), and 3) up-tick in ad-spend to battle intensifying
competition.
Outlook and Valuation
Post the 4QCY2010 result we have revised our earnings estimates for Nestle
marginally downwards by ~2–3% to factor in higher depreciation as the company
undertakes heavy capex. Management indicated commissioning of two green-field
projects, and stated it would invest ~`15-17bn in various brown-field projects.
At the CMP of `3,480, the stock is trading close to its 3-year average P/E of 28.8x
CY2012E EPS of `121. We maintain our Neutral view on the stock, with a revised
Fair Value of `3,370 (`3,501) and await better entry opportunities in the stock.
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