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Nestle India’s (NI) long growth potential remains one of the best in the FMCG sector. That said,
2QFY11 earnings at 17% EBITDA growth was 4% below forecasts, and PAT growth at just 10%
due higher taxes. Recent outperformance could unwind, given 2Q earnings and rich valuations
Strong 21% domestic sales growth
Net sales in 2Q11 grew 20% yoy to Rs17.6bn compared to our estimate of Rs17.9bn, driven
by strong growth in domestic business.
Domestic business grew 21% yoy to Rs16.4bn in 2Q11 on account of growth in both volumes
and realisations. Export business grew 11% yoy to Rs1.2bn in 2Q11. Export growth was
adversely affected by ban on exports of milk powder
17% EBITDA growth; 4% below our estimate
EBITDA grew 17% yoy to Rs3.4bn in 2Q11, 4% below our expectation of Rs3.6bn. EBITDA
margin contracted 50bps yoy and 175 qoq to 19.5% in 2Q11. Sequential decline in EBITDA
margin is due to the 114bps rise in the employee costs as a percentage of net sales, which
went up from 6.7% in 1Q11 to 7.8% in 2Q11 (7.6% in 2Q10).
Raw material costs as a percentage of sales increased 42bps yoy and 61bps qoq to 49.5% of
net sales in 2Q11, due to higher commodity prices (mainly milk solids, green coffee and
oil/fats).
Earnings affected by higher tax rate
Profit before tax grew 15% yoy to Rs3.2bn. Interest costs substantially increased from
Rs0.7m in 1Q11 to Rs5.8m in 2Q11 due to increased borrowings to fund capex needs. Other
income fell 21% yoy to Rs80m.
Profit after tax grew 10% yoy to Rs2.1bn in 2Q11. Effective tax rate for 2Q11 stood at 30.3%,
compared to 26.3% in 2Q10 and 28.1% in 1Q11. Increase in tax expense is mainly due to the
end of 5 years of @100% tax holiday in Pantnagar factory. For next 5 years, the tax holiday at
this facility will continue at 30% of profits.
Rising capex to strengthen NI’s competitive position
NI is focusing on a three-pronged strategy of doubling existing capacities, increase
innovations in existing categories and introducing new categories, which will lead to a 20%
plus growth for the year. NI is expanding plant capacities in Nanjangud, Ponda and setting up
new plant in Himachal Pradesh.
The company intends to invest around US$ 450 million in two to three years for capacity
expansion. To this end, the company has drawn US$50m from parent company, Nestle SA
for 5 years. Total debt at the end of 2Q11 stood at Rs2.7bn (US$60m). The year to date cost
of this borrowing including interest and exchange differences is Rs24m, which is 4.9% on an
annualised basis.
We feel the rising capex will strengthen NI’s competitive position. Additional capacity should
boost volumes going forward across segments such as culinary products, chocolates and
infant foods. NI’s domestic sales have grown at a CAGR of 23% in last 5 years, and we
believe, it can conservatively sustain at least a 20% growth going forward.
Valuation
NI faces volatile raw material prices, coupled with the financial impact of higher capex on
near-term earnings. At its current market price of Rs4,360.10, the company’s stock trades at a
PE multiple of 46.6x our FY11F EPS of Rs93.5 and 38.9x our FY12F EPS of Rs112.2.
Recent out-performance could unwind, given Q2 earnings, and rich valuations, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nestle India’s (NI) long growth potential remains one of the best in the FMCG sector. That said,
2QFY11 earnings at 17% EBITDA growth was 4% below forecasts, and PAT growth at just 10%
due higher taxes. Recent outperformance could unwind, given 2Q earnings and rich valuations
Strong 21% domestic sales growth
Net sales in 2Q11 grew 20% yoy to Rs17.6bn compared to our estimate of Rs17.9bn, driven
by strong growth in domestic business.
Domestic business grew 21% yoy to Rs16.4bn in 2Q11 on account of growth in both volumes
and realisations. Export business grew 11% yoy to Rs1.2bn in 2Q11. Export growth was
adversely affected by ban on exports of milk powder
17% EBITDA growth; 4% below our estimate
EBITDA grew 17% yoy to Rs3.4bn in 2Q11, 4% below our expectation of Rs3.6bn. EBITDA
margin contracted 50bps yoy and 175 qoq to 19.5% in 2Q11. Sequential decline in EBITDA
margin is due to the 114bps rise in the employee costs as a percentage of net sales, which
went up from 6.7% in 1Q11 to 7.8% in 2Q11 (7.6% in 2Q10).
Raw material costs as a percentage of sales increased 42bps yoy and 61bps qoq to 49.5% of
net sales in 2Q11, due to higher commodity prices (mainly milk solids, green coffee and
oil/fats).
Earnings affected by higher tax rate
Profit before tax grew 15% yoy to Rs3.2bn. Interest costs substantially increased from
Rs0.7m in 1Q11 to Rs5.8m in 2Q11 due to increased borrowings to fund capex needs. Other
income fell 21% yoy to Rs80m.
Profit after tax grew 10% yoy to Rs2.1bn in 2Q11. Effective tax rate for 2Q11 stood at 30.3%,
compared to 26.3% in 2Q10 and 28.1% in 1Q11. Increase in tax expense is mainly due to the
end of 5 years of @100% tax holiday in Pantnagar factory. For next 5 years, the tax holiday at
this facility will continue at 30% of profits.
Rising capex to strengthen NI’s competitive position
NI is focusing on a three-pronged strategy of doubling existing capacities, increase
innovations in existing categories and introducing new categories, which will lead to a 20%
plus growth for the year. NI is expanding plant capacities in Nanjangud, Ponda and setting up
new plant in Himachal Pradesh.
The company intends to invest around US$ 450 million in two to three years for capacity
expansion. To this end, the company has drawn US$50m from parent company, Nestle SA
for 5 years. Total debt at the end of 2Q11 stood at Rs2.7bn (US$60m). The year to date cost
of this borrowing including interest and exchange differences is Rs24m, which is 4.9% on an
annualised basis.
We feel the rising capex will strengthen NI’s competitive position. Additional capacity should
boost volumes going forward across segments such as culinary products, chocolates and
infant foods. NI’s domestic sales have grown at a CAGR of 23% in last 5 years, and we
believe, it can conservatively sustain at least a 20% growth going forward.
Valuation
NI faces volatile raw material prices, coupled with the financial impact of higher capex on
near-term earnings. At its current market price of Rs4,360.10, the company’s stock trades at a
PE multiple of 46.6x our FY11F EPS of Rs93.5 and 38.9x our FY12F EPS of Rs112.2.
Recent out-performance could unwind, given Q2 earnings, and rich valuations, in our view.
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