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What’s the theme?
We believe the entry of new players in the hitherto-secure noodles segment challenges Nestle's 'cash
cow' - Maggie noodles. Further, we believe the premium enjoyed by the stock vis-à-vis FMCG peers is
unjustified and would correct.
What will move the stock?
1) Intense competition in the noodle segment (~35% of total EBITDA) would impact Nestle's pricing power.
We expect decline in EBITDA margin by 50bps and 60bps in CY11 and CY12; 2) Nestle currently trades at
~48% premium over FMCG sector. However considering lower pricing power for key products and pressure
on return ratios, we believe that this premium will narrow to 25% (last two-year average).
Where are we stacked versus consensus?
Our estimates and target price are among the lowest on the street, underpinned by pressure on EBITDA
margin and narrowing of Nestle's P/E premium to 25%. We assign P/E of 30x on next 12-months earnings
to derive TP of Rs3,208.
What will challenge our target price?
1) We expect Nestle would focus on retaining volume market share for Maggi noodles and therefore
assume volume-driven growth going forward. This assumption would result in lower profitability for Nestle.
Any change in this strategy would impact our estimates; 2) We expect ITC, GSK Consumer and HUL to be
aggressive in the noodle segment; any delay in such efforts would again help Nestle record better profitability
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s the theme?
We believe the entry of new players in the hitherto-secure noodles segment challenges Nestle's 'cash
cow' - Maggie noodles. Further, we believe the premium enjoyed by the stock vis-à-vis FMCG peers is
unjustified and would correct.
What will move the stock?
1) Intense competition in the noodle segment (~35% of total EBITDA) would impact Nestle's pricing power.
We expect decline in EBITDA margin by 50bps and 60bps in CY11 and CY12; 2) Nestle currently trades at
~48% premium over FMCG sector. However considering lower pricing power for key products and pressure
on return ratios, we believe that this premium will narrow to 25% (last two-year average).
Where are we stacked versus consensus?
Our estimates and target price are among the lowest on the street, underpinned by pressure on EBITDA
margin and narrowing of Nestle's P/E premium to 25%. We assign P/E of 30x on next 12-months earnings
to derive TP of Rs3,208.
What will challenge our target price?
1) We expect Nestle would focus on retaining volume market share for Maggi noodles and therefore
assume volume-driven growth going forward. This assumption would result in lower profitability for Nestle.
Any change in this strategy would impact our estimates; 2) We expect ITC, GSK Consumer and HUL to be
aggressive in the noodle segment; any delay in such efforts would again help Nestle record better profitability
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