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Nestle India (NEST)
Consumer products
Good show. Domestic sales growth of 23% (on a relatively low base) and gross margin
expansion are key positives in 1QCY11. We watch for (1) sustainability of margins,
(2) likely impact on sales due to mismatch between demand and supply in 2HCY11E
and (3) stabilization in market shares of newer players in noodles (ITC, GSK and HUL).
We continue to believe that Nestle is nervous to face competition in the noodles
category (particularly ITC). We like the market opportunity for most of Nestlé’s
categories, however, we recommend better entry points into the stock (it trades at a
10-year high relative P/E versus BSE-30 index P/E). At 37X FY2012E, there is no room for
execution risk. Retain estimates and REDUCE rating with a revised TP of Rs3,500.
Strong quarter (on a relatively low base)
In 1QCY11, Nestle reported net sales of Rs18.1 bn (+22%, KIE Rs18.2 bn), EBITDA of Rs3.9 bn
(+27%, KIE Rs3.8 bn) and PAT of Rs2.6 bn (+33%, KIE Rs2.5 bn).
Domestic sales growth of 23% is primarily on the back of volume growth of ~15%. Sales growth
is impressive, however, we note that it is on the back of relatively low base – 17% overall sales
growth in 1QCY10 and ~24% growth for the rest of CY2010. Exports have grown by 10% yoy as
the company has commissioned the Nanjangud plant during the quarter.
EBITDA margin improvement of 80 bps is driven by gross margin expansion – while input cost
(milk, milk powder, wheat) continued to be inflationary, a product mix in favor of Prepared Dishes
and Cooking Aids, primarily Maggi, likely helped in savings in packing material cost. Moreover,
likely improvement in realizations and sales mix were also contributors (lower sales to Canteen
Sales Department).
Other expenditure was higher by 30 bps as it includes special charges for the re-design of factory
layout to expand the existing factory locations. Adspends were likely higher on a yoy basis due to
relaunch of Nescafe with celebrity endorsement (in the coffee category).
According to the company, the growth in depreciation is subdued as the increase in the
depreciation of tangible fixed assets is substantially offset by the reduction in amortization of
management information systems as the same have been fully amortized.
Key areas to watch for CY2011E
Sustainability of margins. At the analyst meet held in March 2011, the company
indicated that margins in CY2011E would likely be under pressure due to input cost
inflation. CY2011E margins could come under pressure from the need for higher
adspends/trade promotions in all categories – milk and nutrition and processed foods
(increasing competition), coffee and chocolates (relaunch).
No2 and 3 positions in instant noodle category to get decided, Maggi may lose
share. CY2011E will likely see No 2 and 3 positions in the instant noodle category getting
chalked out - the new entrants in the instant noodle category, GSK Consumer, ITC and
HUL (soupy noodles) will complete more than a year of operation by the end of CY2011E.
Operations will likely stabilize, coverage universe will increase and market share will get
evened out – at present, GSK is primarily present in south and east and ITC is present in
south. Maggi will continue to hold its leadership position but may face market share pressure.
Triggered by the competition in the instant noodle category, CY2011E will likely
see the launch of an additional Maggi variant. The company has already launched a
teaser and is encouraging consumer participation to decide the type of masala variant
(incidentally, this seems to be following competition – ITC had launched its noodles with
two masala flavors and Nestle is probably following it).
At 31X CY2012E and at a 10-year high relative P/E, retain REDUCE
We like the market opportunity for most of Nestlé’s categories, however, we recommend
better entry points into the stock (it trades at a 10-year high relative P/E versus BSE-30 index
P/E). At 31X CY2012E, there is no room for execution risk. Retain estimates and REDUCE
rating with a revised TP of Rs3, 500 (Rs3, 000 previously). We continue to value Nestle at the
last three year average P/E of 28X. 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
Good show. Domestic sales growth of 23% (on a relatively low base) and gross margin
expansion are key positives in 1QCY11. We watch for (1) sustainability of margins,
(2) likely impact on sales due to mismatch between demand and supply in 2HCY11E
and (3) stabilization in market shares of newer players in noodles (ITC, GSK and HUL).
We continue to believe that Nestle is nervous to face competition in the noodles
category (particularly ITC). We like the market opportunity for most of Nestlé’s
categories, however, we recommend better entry points into the stock (it trades at a
10-year high relative P/E versus BSE-30 index P/E). At 37X FY2012E, there is no room for
execution risk. Retain estimates and REDUCE rating with a revised TP of Rs3,500.
Strong quarter (on a relatively low base)
In 1QCY11, Nestle reported net sales of Rs18.1 bn (+22%, KIE Rs18.2 bn), EBITDA of Rs3.9 bn
(+27%, KIE Rs3.8 bn) and PAT of Rs2.6 bn (+33%, KIE Rs2.5 bn).
Domestic sales growth of 23% is primarily on the back of volume growth of ~15%. Sales growth
is impressive, however, we note that it is on the back of relatively low base – 17% overall sales
growth in 1QCY10 and ~24% growth for the rest of CY2010. Exports have grown by 10% yoy as
the company has commissioned the Nanjangud plant during the quarter.
EBITDA margin improvement of 80 bps is driven by gross margin expansion – while input cost
(milk, milk powder, wheat) continued to be inflationary, a product mix in favor of Prepared Dishes
and Cooking Aids, primarily Maggi, likely helped in savings in packing material cost. Moreover,
likely improvement in realizations and sales mix were also contributors (lower sales to Canteen
Sales Department).
Other expenditure was higher by 30 bps as it includes special charges for the re-design of factory
layout to expand the existing factory locations. Adspends were likely higher on a yoy basis due to
relaunch of Nescafe with celebrity endorsement (in the coffee category).
According to the company, the growth in depreciation is subdued as the increase in the
depreciation of tangible fixed assets is substantially offset by the reduction in amortization of
management information systems as the same have been fully amortized.
Key areas to watch for CY2011E
Sustainability of margins. At the analyst meet held in March 2011, the company
indicated that margins in CY2011E would likely be under pressure due to input cost
inflation. CY2011E margins could come under pressure from the need for higher
adspends/trade promotions in all categories – milk and nutrition and processed foods
(increasing competition), coffee and chocolates (relaunch).
No2 and 3 positions in instant noodle category to get decided, Maggi may lose
share. CY2011E will likely see No 2 and 3 positions in the instant noodle category getting
chalked out - the new entrants in the instant noodle category, GSK Consumer, ITC and
HUL (soupy noodles) will complete more than a year of operation by the end of CY2011E.
Operations will likely stabilize, coverage universe will increase and market share will get
evened out – at present, GSK is primarily present in south and east and ITC is present in
south. Maggi will continue to hold its leadership position but may face market share pressure.
Triggered by the competition in the instant noodle category, CY2011E will likely
see the launch of an additional Maggi variant. The company has already launched a
teaser and is encouraging consumer participation to decide the type of masala variant
(incidentally, this seems to be following competition – ITC had launched its noodles with
two masala flavors and Nestle is probably following it).
At 31X CY2012E and at a 10-year high relative P/E, retain REDUCE
We like the market opportunity for most of Nestlé’s categories, however, we recommend
better entry points into the stock (it trades at a 10-year high relative P/E versus BSE-30 index
P/E). At 31X CY2012E, there is no room for execution risk. Retain estimates and REDUCE
rating with a revised TP of Rs3, 500 (Rs3, 000 previously). We continue to value Nestle at the
last three year average P/E of 28X. 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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