NESTLE 4QCY13: Below estimates; multi-year low domestic sales growth; Cut estimates 2-6%; Maintain Neutral

NESTLE 4QCY13: Below estimates; multi-year low domestic sales growth; Cut estimates 2-6%; Maintain Neutral

(NEST IN, Mkt Cap USD8.9b, CMP INR 5,597, TP INR 5,300, 5% downside, Neutral)

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-       Nestle India 4QCY13 results were below estimates and underscored the slowdown in urban consumption. Sales, EBITDA and PAT came in at INR22.5b (up 4.6%, est. INR24b), INR4.7b (down 6%; est INR5.5b) and INR2.9b (down 1.5%; est INR3.2b), respectively. EBITDA margins declined 220bps to 20.8%.

-       Sales growth of 4.6% was led by 21% YoY growth in Exports which was in-turn driven by Exports to affiliates and currency depreciation.

-       Domestic sales growth almost at a decadal low: Domestic sales posted a sub-par 3.7% YoY growth, lowest in ~10 years (3.1% growth in Jun-04). This growth was primarily led by pricing and mix, as per management.

-       EBITDA decline after 15 quarters: Gross margins contracted 180bps to 53.4% (est. 54.5%) due to mix deterioration in favor of exports, in our view. Gross margin contraction is first in the last 10 quarters. Thus, EBITDA margins declined 220bps YoY flat to 20.8% (est. 22.8%) exacerbated by 40bp increase in other expenses. EBITDA declined 5.7% to INR4.7b (est. INR5.5b), first time in 15 quarters.

-       Lower depreciation expenses (down 9.4% YoY), interest cost (flat YoY) and higher other income (doubled YoY) resulted in flat PBT. Higher tax rate (up 120bps YoY) led to 1.5% adj PAT decline. Reported PAT grew 1% due to lower provisions. We cut estimates 2-6%.

-       CY13 highlights: CY13 Sales, EBITDA and PAT have grown 9%, 8.5% and 8% growth, respectively. Nestle has become net cash with INR1.9b of net cash as on year end.

-       Stock trades at 35.4x CY14E EPS and 30x CY15E EPS. Demand/volume revival is key for the sustenance of Nestle’s premium valuations, in our view and we do not see that happening in a hurry given the muted consumer sentiments and weak macros. Maintain Neutral rating on the stock with a revised TP of INR5,065 (33x CY15E, 10% premium to ITC), 5% downside.

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