Nestle (NEST IN, INR 4,635, Hold)
We recently met Nestle management. Volume growth which has been lower than expectation in the past few quarters remains challenging due to discretionary slowdown in foods and high competitive intensity in Coffee, Chocolates and Noodles. On the positive side, the company’s capacity is now largely in place to meet any demand. Also roping in Amitabh Bachchan for its brand Maggi has aided a revival in the brand’s volume growth. Few innovations like Milkmaid Creations Kulfi have done exceptionally well. However, raw material pressure remains high. We expect a pick-up in the new product pipeline aided by the likely commencement of its R&D center and backed by aggressive ad spends (new focus on digital and regional media) that might help reverse the slowdown in sales. Maintain ‘HOLD’.
Capacity largely in place; managing RM costs remains a challenge
Competition has become an issue, especially in Chocolates (Cadbury), Noodles (ITC) and Coffee (HUL). We expect Nestle to increase the intensity of innovations/new launches as the company’s capacity is largely in place. However, RM pressure persists as its Commodity Basket Price Index has gone up from 138 in CY11 to 148 in YTD CY12.
Expansion plans, distribution reach to aid growth
Nestle has spent INR22.7bn on capex over the last six quarters, more than its gross block of INR18.6bn at the end of CY10 (~100 years’ gross block), thus underlining its commitment to expand in India. Also, the company is likely to make continuous efforts to increase its distribution reach in North-East India.
Outlook and valuations: Fairly valued; maintain ‘HOLD’
Nestle is the best play in the packaged food category in India over the longer term. We believe that volume growth would recover in coming quarters due to corrective actions taken by Nestle and its intense focus on new product launches. However, rising input cost is a worry. At CMP, the stock is trading at 39.7x CY12E and 32.7x CY13E and appears fairly valued over the near term. We maintain ‘HOLD/ Sector Performer’.
Regards,
No comments:
Post a Comment