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Nestlé India
Gearing up for growth
Nestlé India's performance has been below expectations with a further
slowdown in volume growth during 1QCY12 due to substantial price
hikes (13%). However, going ahead, over the next six months, we believe
that it would post a recovery in volumes with ramp up in marketing
spends and increase in distribution. Additionally, the rising awareness
for nourishment in the rural markets augurs well for the long-term growth
plans of the company. We maintain a HOLD recommendation.
Net sales grew by 13.1% to INR20.5bn in the backdrop of a 13.7% growth in
domestic sales at INR19.5bn and 3.3% growth in export sales at INR1.01bn. In
our view domestic volume growth during the quarter has been almost flat.
EBITDA grew by 19% to INR4.57bn and EBITDA margin expanded by 104bps to
22.3%. The improvement in EBITDA margin was on account of 301bps drop in
raw material cost to 45.8%. However, this improvement in EBITDA margin was
below our expectations due to a 90bps increase in staff cost to 7.6% of net sales
and 107bps increase in other expenses to 24.3% of net sales. The increase in staff
cost has been due to increase in headcount to support the company's expansion
initiatives. Additionally, the increase in other expenditure we believe has been
because of ramp up in marketing expenditure.
Profit before tax grew by 14% to INR4.16bn while recurring PAT grew at a lower
rate of 10% to INR2.9bn due to an increase in effective tax rate by 248bps to
30.6% of PBT.
Our channel checks suggest a substantial increase in marketing initiatives to fuel
strong growth in sales during the next three years backed by the capacity expansion.
Therefore, we believe that volume growth will recover over a period of six months
led by the substantial ramp up in operations and subsiding of the impact of the
price hikes. Additionally, the company's medium to long-term growth potential
remains strong with rising awareness of nourishment even in the rural markets.
Valuation and outlook
At the CMP of INR4,938, the stock is trading at a PE of 40.5x CY12e and 33x CY13e.
We believe that Nestlé India would witness a strong recovery in sales momentum
during CY13e backed by the ramp up in production and distribution. We therefore
upgrade our EPS estimates by 2.4% for CY13e to INR149.8. We maintain our HOLD
recommendation on the stock at the current levels with a target price of INR4,495
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nestlé India
Gearing up for growth
Nestlé India's performance has been below expectations with a further
slowdown in volume growth during 1QCY12 due to substantial price
hikes (13%). However, going ahead, over the next six months, we believe
that it would post a recovery in volumes with ramp up in marketing
spends and increase in distribution. Additionally, the rising awareness
for nourishment in the rural markets augurs well for the long-term growth
plans of the company. We maintain a HOLD recommendation.
Net sales grew by 13.1% to INR20.5bn in the backdrop of a 13.7% growth in
domestic sales at INR19.5bn and 3.3% growth in export sales at INR1.01bn. In
our view domestic volume growth during the quarter has been almost flat.
EBITDA grew by 19% to INR4.57bn and EBITDA margin expanded by 104bps to
22.3%. The improvement in EBITDA margin was on account of 301bps drop in
raw material cost to 45.8%. However, this improvement in EBITDA margin was
below our expectations due to a 90bps increase in staff cost to 7.6% of net sales
and 107bps increase in other expenses to 24.3% of net sales. The increase in staff
cost has been due to increase in headcount to support the company's expansion
initiatives. Additionally, the increase in other expenditure we believe has been
because of ramp up in marketing expenditure.
Profit before tax grew by 14% to INR4.16bn while recurring PAT grew at a lower
rate of 10% to INR2.9bn due to an increase in effective tax rate by 248bps to
30.6% of PBT.
Our channel checks suggest a substantial increase in marketing initiatives to fuel
strong growth in sales during the next three years backed by the capacity expansion.
Therefore, we believe that volume growth will recover over a period of six months
led by the substantial ramp up in operations and subsiding of the impact of the
price hikes. Additionally, the company's medium to long-term growth potential
remains strong with rising awareness of nourishment even in the rural markets.
Valuation and outlook
At the CMP of INR4,938, the stock is trading at a PE of 40.5x CY12e and 33x CY13e.
We believe that Nestlé India would witness a strong recovery in sales momentum
during CY13e backed by the ramp up in production and distribution. We therefore
upgrade our EPS estimates by 2.4% for CY13e to INR149.8. We maintain our HOLD
recommendation on the stock at the current levels with a target price of INR4,495
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