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Nestle India (NEST)
Consumer products
A modest disappoint on volumes and gross margins. In 2QCY11, Nestlé had
volume growth of ~12% (lower than >15% in the last two years) whereas gross
margins declined 50 bps despite price increases of ~8% (led by infant foods category,
some of the products were relaunched) and mix improvement (lower sales to Canteen
Stores Department). It has invested Rs7 bn in the capex program in 1HCY11 and has
availed an ECB of US$60 mn from Nestle SA. It has kept the INR: USD position
unhedged. REDUCE, the stock trades at 35X CY2012E (highest-ever relative P/E versus
BSE-30 index since 2000).
Strong sales growth; gross margin decline and higher tax rate impacts PAT growth
In 2QCY11, Nestle reported net sales of Rs17.6 bn (+20%, KIE Rs18.2 bn), EBITDA of Rs3.4 bn
(+17%, KIE Rs3.7 bn) and PAT of Rs2.2 bn (+9%, KIE Rs2.4 bn).
Overall sales growth of 20% is led by domestic sales growth of 21% and exports of 11%. In
our view, domestic sales growth is led by volume growth of ~12% (price growth of ~8%; price
increases effected in most categories, predominantly infant foods).
As per management, exports growth was impacted due to ban on export of milk powder. This
is the sixth consecutive quarter of low exports growth (-10% in 1QCY11, 17% in 4QCY10, -
3% in 3QCY10. In 2QCY10 exports growth was 36% on the back of a low base [-14% in
2QCY09] and in 1QCY10 exports growth was 20% on the back of -15% growth in 1QCY09).
In our view, the company may be shifting capacity to meet domestic requirements which has
relatively higher margins.
EBITDA margin declined 50 bps to 19.5% on account of decline gross margins (higher material
costs such as milk, coffee, wheat). Other expenditure increased 20% yoy but declined 3% qoq
as 1QCY11 included special charges for the re-design of factory layout to expand the existing
factory locations. The margin decline is despite the mix improvement witnessed by Nestle as it
has likely let go of sales to Canteen Stores Department (Defence and military of government).
The company had earlier indicated that the terms of trade (likely lower margins and higher
receivables, in our view) are not attractive.
Effective tax rate increased to 30% during the quarter from 26% in 2QCY10 due to the
expiration of 100% tax holiday on the profits of the Pantnagar facility. For the next five years
the tax holiday will be 30% of the profits of the factory. It is one of the key facilities for Nestlé’s
culinary products category (~25% of production, in our view).
The company’s fixed assets (gross block + capital work in progress) have increased by
Rs7bn during 1HCY11. It has availed an ECB of USD60 mn from Nestle SA. The company
has kept the INR: USD position unhedged. The YTD cost of this borrowing including
interest and exchange differences is Rs24.2 mn which is ~4.9% on an annualized basis.
Nestle India has an aggressive capex program in all categories except beverages wherein it
would invest Rs17 bn in brownfield expansion (Samalkha: Rs6.5 bn, Ponda: Rs5 bn,
Nanjangud: Rs4 bn and Bicholim: Rs1.5 bn) in addition to two greenfield plans.
We watch out for..
Continuing competition in the instant noodles category. Competition in the
category continues to remain intense with HUL, GSK Consumer and ITC vying for a
sizeable share of the market. ITC recently commented “‘Sunfeast Yippee!’ noodles,
launched last year, continued to gain increasing consumer franchise. The product was
extended to additional markets during the quarter”. We reiterate our longstanding view
that Maggi is likely to lose substantial market shares in the noodles category.
Managing margins. With input costs remaining inflationary and competition intense
(necessitating higher adspends and trade promotions), we would look for the company’s
ability to manage margins. We model EBITDA margin of 20.2% and 20.3% for CY2011E
and CY2012E (broadly flat).
At 35X CY2012E and at a 10-year high relative P/E, retain REDUCE
While we like the market opportunity for most of Nestlé’s categories, we recommend better
entry points into the stock (it trades at a 10-year high relative P/E versus BSE-30 index P/E).
Our EPS estimates are broadly maintained at Rs103.6 (+19%) and Rs123.2 (+19%) for
CY2011E and CY2012E, respectively. At 35X CY2012E P/E, there is no room for execution
risk. Retain estimates and REDUCE rating with TP of Rs3, 500. 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
A modest disappoint on volumes and gross margins. In 2QCY11, Nestlé had
volume growth of ~12% (lower than >15% in the last two years) whereas gross
margins declined 50 bps despite price increases of ~8% (led by infant foods category,
some of the products were relaunched) and mix improvement (lower sales to Canteen
Stores Department). It has invested Rs7 bn in the capex program in 1HCY11 and has
availed an ECB of US$60 mn from Nestle SA. It has kept the INR: USD position
unhedged. REDUCE, the stock trades at 35X CY2012E (highest-ever relative P/E versus
BSE-30 index since 2000).
Strong sales growth; gross margin decline and higher tax rate impacts PAT growth
In 2QCY11, Nestle reported net sales of Rs17.6 bn (+20%, KIE Rs18.2 bn), EBITDA of Rs3.4 bn
(+17%, KIE Rs3.7 bn) and PAT of Rs2.2 bn (+9%, KIE Rs2.4 bn).
Overall sales growth of 20% is led by domestic sales growth of 21% and exports of 11%. In
our view, domestic sales growth is led by volume growth of ~12% (price growth of ~8%; price
increases effected in most categories, predominantly infant foods).
As per management, exports growth was impacted due to ban on export of milk powder. This
is the sixth consecutive quarter of low exports growth (-10% in 1QCY11, 17% in 4QCY10, -
3% in 3QCY10. In 2QCY10 exports growth was 36% on the back of a low base [-14% in
2QCY09] and in 1QCY10 exports growth was 20% on the back of -15% growth in 1QCY09).
In our view, the company may be shifting capacity to meet domestic requirements which has
relatively higher margins.
EBITDA margin declined 50 bps to 19.5% on account of decline gross margins (higher material
costs such as milk, coffee, wheat). Other expenditure increased 20% yoy but declined 3% qoq
as 1QCY11 included special charges for the re-design of factory layout to expand the existing
factory locations. The margin decline is despite the mix improvement witnessed by Nestle as it
has likely let go of sales to Canteen Stores Department (Defence and military of government).
The company had earlier indicated that the terms of trade (likely lower margins and higher
receivables, in our view) are not attractive.
Effective tax rate increased to 30% during the quarter from 26% in 2QCY10 due to the
expiration of 100% tax holiday on the profits of the Pantnagar facility. For the next five years
the tax holiday will be 30% of the profits of the factory. It is one of the key facilities for Nestlé’s
culinary products category (~25% of production, in our view).
The company’s fixed assets (gross block + capital work in progress) have increased by
Rs7bn during 1HCY11. It has availed an ECB of USD60 mn from Nestle SA. The company
has kept the INR: USD position unhedged. The YTD cost of this borrowing including
interest and exchange differences is Rs24.2 mn which is ~4.9% on an annualized basis.
Nestle India has an aggressive capex program in all categories except beverages wherein it
would invest Rs17 bn in brownfield expansion (Samalkha: Rs6.5 bn, Ponda: Rs5 bn,
Nanjangud: Rs4 bn and Bicholim: Rs1.5 bn) in addition to two greenfield plans.
We watch out for..
Continuing competition in the instant noodles category. Competition in the
category continues to remain intense with HUL, GSK Consumer and ITC vying for a
sizeable share of the market. ITC recently commented “‘Sunfeast Yippee!’ noodles,
launched last year, continued to gain increasing consumer franchise. The product was
extended to additional markets during the quarter”. We reiterate our longstanding view
that Maggi is likely to lose substantial market shares in the noodles category.
Managing margins. With input costs remaining inflationary and competition intense
(necessitating higher adspends and trade promotions), we would look for the company’s
ability to manage margins. We model EBITDA margin of 20.2% and 20.3% for CY2011E
and CY2012E (broadly flat).
At 35X CY2012E and at a 10-year high relative P/E, retain REDUCE
While we like the market opportunity for most of Nestlé’s categories, we recommend better
entry points into the stock (it trades at a 10-year high relative P/E versus BSE-30 index P/E).
Our EPS estimates are broadly maintained at Rs103.6 (+19%) and Rs123.2 (+19%) for
CY2011E and CY2012E, respectively. At 35X CY2012E P/E, there is no room for execution
risk. Retain estimates and REDUCE rating with TP of Rs3, 500. 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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