Volume growth under pressure Nestle :: Centrum

Volume growth under pressure
Nestle posted 7.8% YoY growth in revenue on the back of price hikes
across products with volume growth expected to be negative. Gross
margin expansion helped the company maintain operating margins
of ~21% while high depreciation related to capex along with higher
tax muted profitability growth to 2.4%. We have marginally reduced
our volume growth estimates and downgrade our rating to Sell.
Results lower than expectations: Nestle posted mere 7.8% YoY growth
(lowest growth in last 30 quarters) in revenues to Rs21,156mn (3.8% below our
expectations). Domestic net sales grew by 7.6% and exports by 10.5%.
Operating profit was at Rs4,434mn (up 8.1% YoY) on the back of 6bps margin
expansion while PAT was 7% below our expectations at Rs2,751mn (up 2.4% YoY).

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Sales growth lowest in 30 quarters: Net domestic sales increased by 7.6% on
the back of net realisations and product mix. Domestic sales growth during
the quarter was adversely impacted by portfolio/channel optimization and
pricing for value in certain products. Volume growth will be negative for the
company against 1.1% growth for H1CY12. Sales growth during the quarter
was the lowest in the last 30 quarters and we believe some pain is still
remaining. While exports to Nestlé affiliates declined by 4.7%, to other third
parties it grew by 29.7%. Rupee depreciation has favorably impacted total
exports growth by 11.6%. Total exports grew by 10.5% to Rs949mn.
Margins continue to expand: Gross margins of the company grew by 225bps to
54.1% due to higher realizations and product portfolio/channel mix, partially offset
by higher input cost. We expect gross margin levels to remain firm. Employee cost
grew by 17.4% due to an increase in headcount to support capacities for business
expansion along with salary hikes during the quarter. Hence, operating margin
expanded by mere 6bps to 20.96%.
Other highlights: Total amount outstanding from the parent remains at
$192mn with no fresh drawdown during the quarter. Exchange differences
amounting to Rs178mn (Rs33mn and Rs145mn for CY11 and H1CY12 respectively)
spent in earlier periods were reversed in the current quarter and capitalized with
the cost of the fixed assets. The one off favorable impact on net profit during the
quarter was Rs120mn (net of tax). The company has completed its Rs25bn
manufacturing expansion.
Downgrade to Sell: We have lowered our CY12/CY13 earnings by 4% and 8%
respectively as the management believed that some actions such as portfolio
rationalisation, channel prioritization and focused innovations had started to
yield results, while other corrective actions on demand generation in specific
categories was taking time. The stock currently trades at 42.5x and 36.5x
CY12E and CY13E PE. We value the stock at 33x CY13E EPS of Rs131.2 and
arrive at a target price of Rs4,327 and downgrade our rating to Sell.