Nestle India : Management confident of sustaining strong growth ; TP: INR3,994 :: Motilal oswal,

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Management confident of sustaining strong growth
Capex plan on track; new capacities to start contributing from CY12
 Confident of sustaining strong growth across segments, though Diwali sales
have not been that good and current operating environment is volatile.
 Has incurred a capex of INR9.1b in 9MCY11; further commitments of
INR11.4b. Has started a new line for Noodles; doubling Chocolate capacity
at Ponda, putting up a greenfield unit in Tahliwal.
 We are positive on NEST’s long-term growth outlook, given strong brands
and market dominance in Infant Nutrition, Instant Coffee and Noodles.
However, valuations are rich – maintain Neutral.
Nestle India (NEST) management appeared confident of sustaining strong growth
despite being cautious on the near-term economic environment. Key takeaways:
 NEST is confident of sustaining strong growth across segments, though Diwali
sales have not been that good and current operating environment is highly volatile.
 The company has incurred a capex of INR9.1b in 9MCY11 (INR4.8b in CY10) and
has further commitments of INR11.4b. It plans to incur major part of the capex by
March 2012 before the sunset clause for income tax (IT) comes into force.
 NEST’s domestic volumes have grown 9.5% while overall volumes are up 8.7% in
9MCY11, as export volumes have declined 10%. A new line for Noodles has been
started; the company is doubling Chocolate capacity at Ponda and is putting up
a greenfield unit in Tahliwal to support new launches next year.
 NEST has gained market share in the key segments of Dairy Whitener, Chocolates
and Coffee. The company has been able to withstand competition from players
like GSK Consumer (SKB), Hindustan Unilever (HUVR) and ITC in high growth
Instant Noodles segment. SKB’s Foodles is back on the drawing board and the
excitement towards HUVR’s Knorr Soupy Noodles has fizzled out.
 The input cost index has increased from 123 in CY10 to 136 in 9MCY11. Palm oil,
coffee and SMP prices have increased 40%, 35% and 27%, respectively, while
the prices of sugar and wheat flour declined. We note that post September, prices
of sugar have surged 20% while the prices of green coffee have increased 14%.
 NEST has increased its distribution reach from 2.3m outlets in CY07 to an expected
4.1m in CY11; it is adding 0.4m-0.5m outlets every year and has a reach equivalent
to 40% of total FMCG sector distribution. Its distribution reach has grown at
15.6% v/s FMCG sector distribution reach growth of 5% CAGR over CY07-11.
Growth outlook intact; valuations rich – maintain Neutral
 We remain positive on the long-term growth outlook for NEST, given strong brands
and market dominance in segments like Infant Nutrition, Instant Coffee and Noodles.
 We expect innovations and new launches to accelerate in segments like
Chocolates, Milk and Nutrition, and Coffee which will enable maintain growth
momentum. Though near-term operating environment is challenging; long-term
outlook remains steady.
 We estimate 20% PAT CAGR over CY10-12. The stock trades at 33.8x CY12E
EPS of INR124.8. Maintain Neutral.