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What’s the theme?
The rising competitive scenario in most of Nestle's categories along with high capex for capacity addition would
force the company to maintain volume market share. Therefore, we expect pressure on pricing power of key
brands. Nestle trades at a ~40% premium to the FMCG sector and we argue that this premium would narrow.
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 40bps in CY11 and CY12; 2) Nestle currently
trades at ~40% 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. We assign P/E of 30x on next 12-months earnings
to derive TP of Rs3,400.
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?
The rising competitive scenario in most of Nestle's categories along with high capex for capacity addition would
force the company to maintain volume market share. Therefore, we expect pressure on pricing power of key
brands. Nestle trades at a ~40% premium to the FMCG sector and we argue that this premium would narrow.
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 40bps in CY11 and CY12; 2) Nestle currently
trades at ~40% 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. We assign P/E of 30x on next 12-months earnings
to derive TP of Rs3,400.
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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