Nestle India- Step-up in capex to meet growth:: Macquarie

Visit http://indiaer.blogspot.com/ for complete details �� ��


Nestle India
Step-up in capex to meet growth
Event
 We interacted with the senior management of Nestlé India (NEST IN, Not
Rated) at the analyst meeting held in Delhi yesterday. Nestlé is seeing good
volume growth across categories, but high raw material prices remain a key
challenge in the near term. Nestle will accelerate investments in capacity
expansions as it readies for large potential demand growth in India.


Impact
 Increase in capital commitment for future growth. Management has
indicated investments of over Rs20bn in brownfield as well as greenfield
expansions in the next 2-3 years. This is a significant increase given Nestlé’s
capex was Rs9bn over last five years. Capital expansion is planned across all
product categories (except beverages) and segments. Most of Nestlé’s
existing facilities are running at all time high utilisations. The company will use
internal accruals and debt financing for funding the planned investments.
 Volume growth remains strong. Nestlé achieved 18% volume growth in the
domestic market during 9MCY10. Prepared dishes and cooking aids (27% of
sales) grew by 25%, Milk products and nutrition (45% of sales) grew by 8%,
Chocolates and confectionaries (15% of sales) grew by 24% and Beverages
(13% of sales) grew by 23%. Overall, revenue growth was 21%.
 High commodity prices continue to hurt. Gross margins had contracted
180bp during 9MCY10 despite a ~5% increase in selling prices during this
period. Nestlé’s commodity basket price index is up 12%YoY, led by a 24%
increase in Fresh milk fat prices and 43% increase in sugar prices. A 31%
increase in palm oil prices over the last two months is further hurting margins.
 Unfazed by competition in noodles category. Nestlé believes the advent of
new players in the noodles category will not impact Maggi’s dominance in the
category. The company believes new players will only help accelerate growth
in the category. Nestlé’s new launches Atta Maggi and Maggi Pasta are
performing as per management’s expectations.

 Strategy is to move up the price points. Nestlé’s strategy is to capture the
top end of Indian consumers by launching premium products from the Nestlé
SA stable. Nestlé is looking at ways to free itself from price-pointed strategy.
At the same time, the company will look at “Indianisation” of its products in the
mainstream segment.


Outlook
 Nestlé is present in very high growth categories, where penetration levels are
very low and competition is modest. Nestlé’s sales to equity turns at 8.8x is
the highest in the sector. Nestlé has consistently delivered ROEs of >100%.
 Nestlé is trading at 37x CY10E and 33x CY11E PER, based on Bloomberg
consensus estimates.