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2QCY11 results
Nestle continued to report strong topline growth with domestic revenues
growing in excess of 20% YoY for the fifth quarter in a row. Gross margin
contraction of 50bps YoY was commendable in the context of 300-500bps
drop reported by peers. Lower than expected other income, higher taxes
/depreciation however impacted net earnings growth which came below our
estimates at 9% YoY even while Ebitda growth was 17%. While we believe
that Nestle is best positioned to capture the strong packaged foods growth
story in India, current valuations at 38x one year forward earnings are
demanding. Maintain Upf (revised target: Rs3,900/sh).
2QCY11 performance below our estimates
Nestle’s 2Q Ebitda rose 17% YoY and came slightly below our estimates; Net
earnings growth was however muted at 9% YoY to Rs2.2bn which was ~10%
below our estimates. This was due to lower other income (-20%; high base –
maturity of treasury last year) and higher depreciation (+21%YoY /+12%QoQ).
Tax rates too rose sharply to 30.3% (cf. 28% in CY10) as ‘Pantnagar’ facility came
out of 100% tax exemption to 30% for next five years.
Topline growth remained in double digits; progress on expansions
Nestle’s topline growth remained strong with fifth quarter of double digit revenue
growth in the domestic segment (+21%) contributed by both, volumes as well as
realisations. Exports however declined 11%, adversely impacted by the ban on
exports of milk powder. The company made progress on capacity expansions,
evident from Rs5bn of rise in fixed assets as well as borrowed funds of Rs2.7bn
parent under ECB (4.9% cost ytd; unhedged).
Margins contracted, though, much better than the sector
Nestle’s gross margins in 2Q declined by 42bps YoY which is commendable in the
current inflationary environment and reflects the pricing power the company
enjoys. In this context, it is useful to note that personal care firms like HUL,
Dabur, Colgate have reported a 300-500bps YoY decline in gross margins during
Jun-11 quarter. Nonetheless, management highlighted cost pressures in
commodities like milk solids, green coffee, oils etc. Drop in Ebitda margins was
similar to gross margins at 50bps to 19.5%.
Valuations remain expensive; maintain U-PF
We maintain our EPS estimates for CY12-13 and note that the implied growth for
2HCY11 comes to ~23%, which should be achievable, in our view. We revise up
our target price to Rs3,900/sh valuing the stock at 30x Mar-13 net earnings.
While the management’s high capex focus reflects its upbeat outlook for future,
current valuations at 39x one year forward earnings already capture strong
growth potential, in our view; we maintain Upf.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2QCY11 results
Nestle continued to report strong topline growth with domestic revenues
growing in excess of 20% YoY for the fifth quarter in a row. Gross margin
contraction of 50bps YoY was commendable in the context of 300-500bps
drop reported by peers. Lower than expected other income, higher taxes
/depreciation however impacted net earnings growth which came below our
estimates at 9% YoY even while Ebitda growth was 17%. While we believe
that Nestle is best positioned to capture the strong packaged foods growth
story in India, current valuations at 38x one year forward earnings are
demanding. Maintain Upf (revised target: Rs3,900/sh).
2QCY11 performance below our estimates
Nestle’s 2Q Ebitda rose 17% YoY and came slightly below our estimates; Net
earnings growth was however muted at 9% YoY to Rs2.2bn which was ~10%
below our estimates. This was due to lower other income (-20%; high base –
maturity of treasury last year) and higher depreciation (+21%YoY /+12%QoQ).
Tax rates too rose sharply to 30.3% (cf. 28% in CY10) as ‘Pantnagar’ facility came
out of 100% tax exemption to 30% for next five years.
Topline growth remained in double digits; progress on expansions
Nestle’s topline growth remained strong with fifth quarter of double digit revenue
growth in the domestic segment (+21%) contributed by both, volumes as well as
realisations. Exports however declined 11%, adversely impacted by the ban on
exports of milk powder. The company made progress on capacity expansions,
evident from Rs5bn of rise in fixed assets as well as borrowed funds of Rs2.7bn
parent under ECB (4.9% cost ytd; unhedged).
Margins contracted, though, much better than the sector
Nestle’s gross margins in 2Q declined by 42bps YoY which is commendable in the
current inflationary environment and reflects the pricing power the company
enjoys. In this context, it is useful to note that personal care firms like HUL,
Dabur, Colgate have reported a 300-500bps YoY decline in gross margins during
Jun-11 quarter. Nonetheless, management highlighted cost pressures in
commodities like milk solids, green coffee, oils etc. Drop in Ebitda margins was
similar to gross margins at 50bps to 19.5%.
Valuations remain expensive; maintain U-PF
We maintain our EPS estimates for CY12-13 and note that the implied growth for
2HCY11 comes to ~23%, which should be achievable, in our view. We revise up
our target price to Rs3,900/sh valuing the stock at 30x Mar-13 net earnings.
While the management’s high capex focus reflects its upbeat outlook for future,
current valuations at 39x one year forward earnings already capture strong
growth potential, in our view; we maintain Upf.
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