Recovering albeit slowly… • Nestlé India:: ICICI Securities, PDF link

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Recovering albeit slowly…
• Nestlé India’s (NIL) Q3CY14 results were above our expectations as
earnings grew 9.2% to | 311.3 crore (I-direct estimate: | 297.2 crore)
• NIL witnessed sales growth of 8.9% to | 2557.8 crore (I-direct
estimate: | 2529.4 crore) with domestic sales up 9.9% to | 2399.2
crore. Domestic growth has been largely price led. However, exports
declined 3.9% on account of lower coffee exports
• Operating margins improved 70 bps to 21.7% (I-direct estimate:
20.3%) on the back of better realisations & lower overhead expenses
to sales. However, raw material costs like milk prices have remained
at elevated levels. Strong operating margins & reduced interest cost
(after the repayment last quarter) resulted in 9.2% PAT growth
Revival in urban demand to aid growth
NIL, the country’s largest packaged foods company whose brands are
tantamount to their respective categories (Maggi, KitKat, Cerelac and
Nescafe) has witnessed a significant decline in its volume growth from
CY12 onwards. Volume growth for company has fallen from ~16% in
CY08-10 to ~3% in CY11-13. We believe the key reason for the decline in
volume growth is NIL’s focus being largely on urban markets and
sustained price hikes (~10% in CY11-13 vs. ~4% in CY08-10) in a slowing
urban demand scenario. Going ahead, led by recovery in urban demand
and NIL’s initiatives to expand its reach and portfolio to target rural
consumers, we expect volume growth to recover, albeit slowly. We
expect volume growth of 3.2% in CY15E & 4% in CY16E. Simultaneously,
price hikes may moderate to ~5% aiding NIL to get volume growth back
and maintain its market share in the respective categories.
Margins to remain high on the back of strong brand equity
NIL is the market leader in instant noodles and baby food products in
India and the No. 2 player in the instant coffee and chocolates segment.
The company’s high brand equity in its leading segments has aided it to
take significant price hikes without denting its market share. Hence, in
spite of a decline in volume and revenue growth (10% CAGR in CY11-13
from 20% CAGR in CY08-11) NIL’s margins remained strong and
strengthened from ~20% in CY08-11 to ~22% in CY11-13. Going ahead,
we believe that with the focus on getting volume growth back, margins
would be restricted at current levels of ~21-22% until CY16E.
Increase in marketing, distribution reach to aid in reviving volumes
NIL’s strong marketing initiatives in the early years (mainly nineties) paid
off well by building a strong brand equity and dominance in its segments.
However, the reach and portfolio mix was largely urban centric, which
restricted the company’s growth following the slowdown in urban
demand along with the inability to capture growing rural demand. Hence,
with the robust opportunity witnessed in rural and semi-urban growth,
NIL is increasingly expanding its reach in these untapped markets. We
believe the increasing reach and sustained marketing initiatives in these
markets would aid in reviving NIL’s revenue growth, going ahead.
Await revival in discretionary demand; maintain HOLD
Though the recent slowdown in urban consumption demand has
impacted NIL’s volume and revenue growth, we believe that with a
recovery in discretionary demand NIL would be a key beneficiary of
emerging packaged foods consumption in India. We value the stock at
40x CY16E EPS of | 153.1, arriving at a target price of | 6123. We have a
HOLD recommendation on the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_Nestle_Q3CY14.pdf