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India Equity Research Reports, IPO and Stock News
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What’s the theme?
We believe entry of new players in the hitherto-secure noodles segment challenges Nestle's 'cash cow'. 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 (consist ~35% of total EBITDA) would impact the pricing
power. We expect decline in EBITDA margin by 31bps and 56bps in CY11 and CY12; 2) Nestle currently
trades at ~38% premium over FMCG sector however considering lower pricing power for key products
and pressure on return ratios we argue that Nestle should trade at a 25% premium (last two-year average).
Where are we stacked versus consensus?
Our estimates and target price are among the lowest on the street, led by pressure on EBITDA margin and
argument of narrowing down the 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 the volume market share for Maggi noodles therefore
assumes volume driven growth going forward. This assumption would result in lower profitability for Nestle
and any change in this proposition might change our estimates; 2) We expect ITC, GSK consumer and
HUL to be very aggressive in noodle segment, any delay in such efforts would again help Nestle to earn
better profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s the theme?
We believe entry of new players in the hitherto-secure noodles segment challenges Nestle's 'cash cow'. 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 (consist ~35% of total EBITDA) would impact the pricing
power. We expect decline in EBITDA margin by 31bps and 56bps in CY11 and CY12; 2) Nestle currently
trades at ~38% premium over FMCG sector however considering lower pricing power for key products
and pressure on return ratios we argue that Nestle should trade at a 25% premium (last two-year average).
Where are we stacked versus consensus?
Our estimates and target price are among the lowest on the street, led by pressure on EBITDA margin and
argument of narrowing down the 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 the volume market share for Maggi noodles therefore
assumes volume driven growth going forward. This assumption would result in lower profitability for Nestle
and any change in this proposition might change our estimates; 2) We expect ITC, GSK consumer and
HUL to be very aggressive in noodle segment, any delay in such efforts would again help Nestle to earn
better profitability.
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