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Preferred play on packaged foods space. We believe the Indian processed foods
market holds substantial potential for an organized player like Nestle whose products
enjoy strong brand equity across various food categories. Exclusive tie-ups with
dairy farmers, widening distribution reach and rising scale of modern retailing should
help the company sustain healthy volume growth.
Innovation and Distribution: Key drivers for medium term growth. Pace of new
product/variant launches and renovations remains fairly vigorous with strong focus
on culinary (Maggi brand) and confectionary segments. There is significant focus on
improving distribution reach and various low unit packs (now 28-30% of sales) have
been launched across product segments to enhance affordability, aiding very strong
double digit growth in tier 4 & smaller towns/villages. Nestle is also actively looking
to augment its premium product portfolio and we believe they could leverage on the
wide product offerings of its parent for the same.
Raw material inflation remains a significant challenge particularly for milk prices
which have remained sticky at higher levels and contrary to initial expectations have
not softened much. Coffee and palm oil prices have also seen a sharp uptick recently.
Nestle has resorted to aggressive price hikes in recent quarters (2.3% in Q110,
5.3% in Q210 and 6.6% in Q310) to mitigate cost pressures and appears confident
about maintaining operating margins in the current range of 19-20%.
Expect A&P costs to trend higher as company is in the process of rolling out new
products and expanding its presence in smaller towns (more promotions) to attract
new consumers.
Higher capex is likely in coming quarters as company plans to invest more in setting
up new manufacturing facilities to meet rising demand for its products.
Price target and valuation analysis
Nestle India (Neutral)
Our Dec’11 PT of Rs3520 is based on 1.65x PEG (at 10% premium to consumer
sector). Our PT implies 27x CY12E P/E, which is in line with its past 3 year average.
The premium (relative to FMCG sector) is justified for Nestle India, in our view,
given high mid/long-term growth prospects for fast-growing high potential processed
foods space in India and Nestle India being one of the few plays on this category.
Key upside risk to our earnings and price target is higher volume growth. On the
downside, key risks are a significant slowdown in consumer spending and any sharp
commodity inflation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Preferred play on packaged foods space. We believe the Indian processed foods
market holds substantial potential for an organized player like Nestle whose products
enjoy strong brand equity across various food categories. Exclusive tie-ups with
dairy farmers, widening distribution reach and rising scale of modern retailing should
help the company sustain healthy volume growth.
Innovation and Distribution: Key drivers for medium term growth. Pace of new
product/variant launches and renovations remains fairly vigorous with strong focus
on culinary (Maggi brand) and confectionary segments. There is significant focus on
improving distribution reach and various low unit packs (now 28-30% of sales) have
been launched across product segments to enhance affordability, aiding very strong
double digit growth in tier 4 & smaller towns/villages. Nestle is also actively looking
to augment its premium product portfolio and we believe they could leverage on the
wide product offerings of its parent for the same.
Raw material inflation remains a significant challenge particularly for milk prices
which have remained sticky at higher levels and contrary to initial expectations have
not softened much. Coffee and palm oil prices have also seen a sharp uptick recently.
Nestle has resorted to aggressive price hikes in recent quarters (2.3% in Q110,
5.3% in Q210 and 6.6% in Q310) to mitigate cost pressures and appears confident
about maintaining operating margins in the current range of 19-20%.
Expect A&P costs to trend higher as company is in the process of rolling out new
products and expanding its presence in smaller towns (more promotions) to attract
new consumers.
Higher capex is likely in coming quarters as company plans to invest more in setting
up new manufacturing facilities to meet rising demand for its products.
Price target and valuation analysis
Nestle India (Neutral)
Our Dec’11 PT of Rs3520 is based on 1.65x PEG (at 10% premium to consumer
sector). Our PT implies 27x CY12E P/E, which is in line with its past 3 year average.
The premium (relative to FMCG sector) is justified for Nestle India, in our view,
given high mid/long-term growth prospects for fast-growing high potential processed
foods space in India and Nestle India being one of the few plays on this category.
Key upside risk to our earnings and price target is higher volume growth. On the
downside, key risks are a significant slowdown in consumer spending and any sharp
commodity inflation.
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