Nestle - Robust outlook justify premium valuation; visit note; HOLD ::Edelweiss

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Nestle (NEST IN, INR 4,207, Hold)

We recently met the Nestle management. The company has seen the fastest growth in prepared dishes (15.4% volume growth) in spite of intense competition (GSK reported a flattish growth despite low base) while Milk and Chocolate segment contribution to sales declined largely because of capacity constraints. The new product pipeline is likely to expand (with the launch of Nestle a+ milk) and capex is gradually coming on track to meet growing demand for its products. Maintain ‘HOLD’.

Prepared dishes sustain performance, Nescafe relaunch succesful

The segment of Prepared dishes (value growth at 27.1% and volume growth ay 15.4% YoY) saw an improvement in contribution to sales during 9MCY11. This could be attributed to a sharp increase in innovations by Nestle in this category, expansion of the market with the entry of new players and market share gains by Nestle besides capacity constraints in Milk and Chocolate segments.

‘Project Shark’ helps expand margins, cost optimisation

Nestlé’s Commodity Basket Price Index has increased from 123 in CY10 to 136 in YTD CY11. In spite of this, it has managed to expand gross and EBITDA margins due to ‘Project Shark’ which led to an enhanced focus on cost optimisation.

Expansion plans raise gearing

The company has stepped up capex plans (capex spend of INR9bn in 9MCY11 with a further commitment of ~INR10bn) to meet the growing demand for its products and launch new ones (existing plants are operating at maximum capacity utilisation).

Outlook and valuation: Fairly valued; maintain ‘HOLD’

Nestle remains the best play in the packaged food segment, having consistently registered buoyant sales growth. At CMP, the stock is trading at 39.6x CY11E and 32.4x CY12E, and appears fairly valued for the near term. Hence, we maintain ‘HOLD/ Sector Performer’