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Nestle India (NEST)
Consumer products
Excellent reported results hide the likely low volumes. Nestlé reported good
headline results—sales +20%, EBITDA +27%, PAT +23%. Volume growth was likely in
single digit, in our view. It had taken disproportionate and steep price increases in select
infant foods—23% yoy in a category where Nestle has incumbency advantage (near
monopoly as advertisements are banned). Price increases ahead of cost inflation likely
aided gross margin expansion. Nestlé’s P&L management is commendable as it likely
utilizes the regulatory advantage in infant foods effectively for its pricing decisions, in
our view. Stock trades at its highest ever relative P/E versus BSE-30 index since 1995.
SELL.
Steep price hikes in infant foods likely reason for gross margin expansion
In 3QCY11, Nestle reported net sales of Rs19.6 bn (+20%, KIE Rs20.3 bn), EBITDA of Rs4.1 bn
(+27%, KIE Rs4 bn) and PAT of Rs2.7 bn (+23%, KIE Rs2.5 bn).
Overall sales growth of 20% is led by domestic sales growth of 21% and exports of 5%. In our
view, domestic sales growth is led by price growth (volume growth in single digit, in our view)
of ~10%. The company has effected price hikes in most categories, predominantly infant foods.
According to the company, low exports growth is on account of ban on exports of milk
powder.
Nestlé’s P&L management is commendable. Gross margins (GM) expanded 91 bps yoy to 52%
when faced with significant input cost inflation, in our view (milk prices have increased by 20%
in CY2011). GM expansion could also be attributed to, (1) faster sales growth in the prepared
dishes and cooking aids segment (primarily constitutes the Maggi brand) as packing material
cost is relatively lower for this segment, (2) relatively higher domestic sales versus exports
(margins are better in domestic business as profitability on exports to other Nestle entities are
lower). EBITDA margin expanded by 120 bps to 20.9% driven by lower other expenditure, likely
savings in adspends. Staff cost as percentage of sales increased by 90 bps yoy.
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. During the quarter, the
company availed debt of US$25 mn from Nestle SA for five years under the External
Commercial Borrowing (ECB) route. The total amount outstanding as of September 30, 2011, is
US$85 mn (Rs4,177 mn).
Interest expense in 3QCY11 was Rs12 mn. Interest earned of Rs9 mn has been reduced
from the interest expense while cost of ECB of Rs378 mn and the mark to market loss of
Rs153 mn on forward sale contract of US$46 mn, has been treated as capital expenditure.
Key monitorables
Continuing good volume in the instant noodles segment. While Maggi is the market
leader, competition in the segment has increased with new entrants over the past year.
On the margin, this quarter, the company would likely have benefitted from supply chain
issues with GSK Consumer’s Foodles. ITC’s Yippie continues to gain traction, in our view
as the activity levels are still high.
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 20.5 and 20.3% for CY2011E
and CY2012E (broadly flat).
Impact of interest burden and movement of INR versus USD impacting the debt profile of
the company.
At 36X CY2012E and at a 15-year high relative P/E, retain SELL
While we like the market opportunity for most of Nestlé’s categories, we recommend better
entry points into the stock (it trades at a 15-year high relative P/E versus BSE-30 index P/E).
We have upgraded our EPS estimates by ~3%—EPS of Rs106.6 and Rs125 for CY2011E and
CY2012E, respectively. At 36X CY2012E P/E, there is no room for execution risk. Retain SELL
rating with target price of Rs3,600 (Rs3,500 previously). 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
Excellent reported results hide the likely low volumes. Nestlé reported good
headline results—sales +20%, EBITDA +27%, PAT +23%. Volume growth was likely in
single digit, in our view. It had taken disproportionate and steep price increases in select
infant foods—23% yoy in a category where Nestle has incumbency advantage (near
monopoly as advertisements are banned). Price increases ahead of cost inflation likely
aided gross margin expansion. Nestlé’s P&L management is commendable as it likely
utilizes the regulatory advantage in infant foods effectively for its pricing decisions, in
our view. Stock trades at its highest ever relative P/E versus BSE-30 index since 1995.
SELL.
Steep price hikes in infant foods likely reason for gross margin expansion
In 3QCY11, Nestle reported net sales of Rs19.6 bn (+20%, KIE Rs20.3 bn), EBITDA of Rs4.1 bn
(+27%, KIE Rs4 bn) and PAT of Rs2.7 bn (+23%, KIE Rs2.5 bn).
Overall sales growth of 20% is led by domestic sales growth of 21% and exports of 5%. In our
view, domestic sales growth is led by price growth (volume growth in single digit, in our view)
of ~10%. The company has effected price hikes in most categories, predominantly infant foods.
According to the company, low exports growth is on account of ban on exports of milk
powder.
Nestlé’s P&L management is commendable. Gross margins (GM) expanded 91 bps yoy to 52%
when faced with significant input cost inflation, in our view (milk prices have increased by 20%
in CY2011). GM expansion could also be attributed to, (1) faster sales growth in the prepared
dishes and cooking aids segment (primarily constitutes the Maggi brand) as packing material
cost is relatively lower for this segment, (2) relatively higher domestic sales versus exports
(margins are better in domestic business as profitability on exports to other Nestle entities are
lower). EBITDA margin expanded by 120 bps to 20.9% driven by lower other expenditure, likely
savings in adspends. Staff cost as percentage of sales increased by 90 bps yoy.
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. During the quarter, the
company availed debt of US$25 mn from Nestle SA for five years under the External
Commercial Borrowing (ECB) route. The total amount outstanding as of September 30, 2011, is
US$85 mn (Rs4,177 mn).
Interest expense in 3QCY11 was Rs12 mn. Interest earned of Rs9 mn has been reduced
from the interest expense while cost of ECB of Rs378 mn and the mark to market loss of
Rs153 mn on forward sale contract of US$46 mn, has been treated as capital expenditure.
Key monitorables
Continuing good volume in the instant noodles segment. While Maggi is the market
leader, competition in the segment has increased with new entrants over the past year.
On the margin, this quarter, the company would likely have benefitted from supply chain
issues with GSK Consumer’s Foodles. ITC’s Yippie continues to gain traction, in our view
as the activity levels are still high.
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 20.5 and 20.3% for CY2011E
and CY2012E (broadly flat).
Impact of interest burden and movement of INR versus USD impacting the debt profile of
the company.
At 36X CY2012E and at a 15-year high relative P/E, retain SELL
While we like the market opportunity for most of Nestlé’s categories, we recommend better
entry points into the stock (it trades at a 15-year high relative P/E versus BSE-30 index P/E).
We have upgraded our EPS estimates by ~3%—EPS of Rs106.6 and Rs125 for CY2011E and
CY2012E, respectively. At 36X CY2012E P/E, there is no room for execution risk. Retain SELL
rating with target price of Rs3,600 (Rs3,500 previously). 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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