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Nestle India
1QC11: Strong Quarter;
Pricing Power to the Fore
Domestic revenue growth solid, export revenues
recover: Nestle reported revenues, operating profit and
adjusted net profit growth of 22%, 26% and 33%,
respectively, as against our expectations of 23.5%,
16.9% and 19.6% for 1QCY11. Domestic FMCG sales
grew +23% yoy driven by continued volume and pricing
momentum. Export sales recovered this quarter,
growing at 10% despite tough comps in Q1 last year.
Key positive surprise for the quarter is gross margin
expansion of 100bps yoy, despite sustained raw
material price inflation across key commodities for
Nestle. This result highlights relatively strong pricing
power for companies with product categories linked to
disposable income growth, we believe.
Operating Profit grew 26% with EBITDA margin up
60bps: According to the management, operating profit
growth was driven by improvement in product & channel
mix as well as reduced promotions during the quarter
offset by a combination of rising input costs and higher
other expenditure. Other expenditure includes one-time
charges for the re-design of factory layout as part of
ongoing capex plans of the company. Other income
increased by 138% due to higher yields, despite lower
liquidity as per management. Tax rate at 28.1% was
90bps lower than our expectation. Nestle has
maintained the first interim dividend of Rs9 per share.
Best Long-Term Growth Potential Among FMCG
Players: We believe that packaged foods in India are
nearing an inflection point and are likely to deliver
around 1,000 bps growth ahead of disposable income
growth for the next 10 years. Nestle is well placed to
capitalize on this growth potential, in our view, given its
strong brand equity, differentiated products, wide global
experience, strong local knowledge and efficient
management team. Although Nestlé trades at a
premium multiple to the group, we believe that its
premium is justified considering its strong long-term
growth potential and great execution track record.
Valuation Methodology & Risks
Derived from the base case intrinsic value per share from our
RI model. Key assumptions in our residual income model are
as follows:
• Cost of equity: 11.2%
• Terminal growth rate: 6% in base case, 7% in bull
case, 5% in bear case;
• Terminal ROE: 75% in base case, 90% in bull case,
38% in bear case.
Key Downside Risks
• A slowdown in market conditions leading to
slower-than-expected growth acceleration in the packaged
foods space.
• Sharp increase in input prices leading to volume pressure.
• Inability to expand product offering.
Key Upside Risks
• Acceleration in rural-led growth for packaged foods.
• Sharp decline in input costs
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nestle India
1QC11: Strong Quarter;
Pricing Power to the Fore
Domestic revenue growth solid, export revenues
recover: Nestle reported revenues, operating profit and
adjusted net profit growth of 22%, 26% and 33%,
respectively, as against our expectations of 23.5%,
16.9% and 19.6% for 1QCY11. Domestic FMCG sales
grew +23% yoy driven by continued volume and pricing
momentum. Export sales recovered this quarter,
growing at 10% despite tough comps in Q1 last year.
Key positive surprise for the quarter is gross margin
expansion of 100bps yoy, despite sustained raw
material price inflation across key commodities for
Nestle. This result highlights relatively strong pricing
power for companies with product categories linked to
disposable income growth, we believe.
60bps: According to the management, operating profit
growth was driven by improvement in product & channel
mix as well as reduced promotions during the quarter
offset by a combination of rising input costs and higher
other expenditure. Other expenditure includes one-time
charges for the re-design of factory layout as part of
ongoing capex plans of the company. Other income
increased by 138% due to higher yields, despite lower
liquidity as per management. Tax rate at 28.1% was
90bps lower than our expectation. Nestle has
maintained the first interim dividend of Rs9 per share.
Best Long-Term Growth Potential Among FMCG
Players: We believe that packaged foods in India are
nearing an inflection point and are likely to deliver
around 1,000 bps growth ahead of disposable income
growth for the next 10 years. Nestle is well placed to
capitalize on this growth potential, in our view, given its
strong brand equity, differentiated products, wide global
experience, strong local knowledge and efficient
management team. Although Nestlé trades at a
premium multiple to the group, we believe that its
premium is justified considering its strong long-term
growth potential and great execution track record.
Valuation Methodology & Risks
Derived from the base case intrinsic value per share from our
RI model. Key assumptions in our residual income model are
as follows:
• Cost of equity: 11.2%
• Terminal growth rate: 6% in base case, 7% in bull
case, 5% in bear case;
• Terminal ROE: 75% in base case, 90% in bull case,
38% in bear case.
Key Downside Risks
• A slowdown in market conditions leading to
slower-than-expected growth acceleration in the packaged
foods space.
• Sharp increase in input prices leading to volume pressure.
• Inability to expand product offering.
Key Upside Risks
• Acceleration in rural-led growth for packaged foods.
• Sharp decline in input costs
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