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• Demand trends remain fairly healthy: Management reported impressive
volume growth trends for 2010 across categories: prepared dishes (24%);
chocolate & confectionary (21%); beverages (13%); and milk products (8%).
Overall 2010 volume growth of 17% (4Q CY10: 15%) was supported by
increased penetration and a wider product portfolio. Volume growth for milk
products was affected by the phasing out of non-strategic products and channels
(defence forces). Management noted in 2010 that it added 464,000 new retail
outlets in Tier 2/3/4 cities, strengthening its redistribution capabilities. They are
hopeful of sustaining healthy growth rates aided by new capacity
commissioning over the next 1-2 years.
• The pace of price increases has picked up in recent quarters, with full year
2010 price growth of 5.4% compared to c2% in 2009. The company is in the
process of making more price increases to mitigate input cost push pressures.
• Premium products to provide next leg of growth: While Nestlé’s PPP
strategy continues to generate healthy demand, it is now looking to augment its
premium product portfolio and would leverage the wide product offerings of its
parent to do this. Notably the company is witnessing consumer uptrading and
moving beyond price-point-specific products; for example, in chocolates,
growth for Rs7/14 priced products is as good as for regular Rs5/10 price points.
• RM inflation remains a significant challenge particularly in the case of crude
(packaging) and coffee. In 2010 the company’s commodity cost index rose 10%
y/y. Price rises and favorable mix should mitigate gross margin pressure.
• Capacity addition plans are on track and these should push up capex
investments considerably in 2011: In 2010, capex amounted to Rs4.5B, nearly
double that of 2009. Management noted that it had negotiated competitive rates
for loans amounting up to US$450MM, to be raised from the parent, which will
be utilized for capacity expansion over the next 2-3 years.
• Other takeaways: 1) Tax rate to rise as a 100% tax holiday at Pantnagar facility
drops to 30% starting in Apr’11. 2) Recent tax measures announced in budget
would have a 22bp negative impact on earnings, other things constant.
• Our view: While we are positive on the company’s growth potential, the current
valuation of 34x CY11E P/E looks fair; we would wait for better entry points.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• Demand trends remain fairly healthy: Management reported impressive
volume growth trends for 2010 across categories: prepared dishes (24%);
chocolate & confectionary (21%); beverages (13%); and milk products (8%).
Overall 2010 volume growth of 17% (4Q CY10: 15%) was supported by
increased penetration and a wider product portfolio. Volume growth for milk
products was affected by the phasing out of non-strategic products and channels
(defence forces). Management noted in 2010 that it added 464,000 new retail
outlets in Tier 2/3/4 cities, strengthening its redistribution capabilities. They are
hopeful of sustaining healthy growth rates aided by new capacity
commissioning over the next 1-2 years.
• The pace of price increases has picked up in recent quarters, with full year
2010 price growth of 5.4% compared to c2% in 2009. The company is in the
process of making more price increases to mitigate input cost push pressures.
• Premium products to provide next leg of growth: While Nestlé’s PPP
strategy continues to generate healthy demand, it is now looking to augment its
premium product portfolio and would leverage the wide product offerings of its
parent to do this. Notably the company is witnessing consumer uptrading and
moving beyond price-point-specific products; for example, in chocolates,
growth for Rs7/14 priced products is as good as for regular Rs5/10 price points.
• RM inflation remains a significant challenge particularly in the case of crude
(packaging) and coffee. In 2010 the company’s commodity cost index rose 10%
y/y. Price rises and favorable mix should mitigate gross margin pressure.
• Capacity addition plans are on track and these should push up capex
investments considerably in 2011: In 2010, capex amounted to Rs4.5B, nearly
double that of 2009. Management noted that it had negotiated competitive rates
for loans amounting up to US$450MM, to be raised from the parent, which will
be utilized for capacity expansion over the next 2-3 years.
• Other takeaways: 1) Tax rate to rise as a 100% tax holiday at Pantnagar facility
drops to 30% starting in Apr’11. 2) Recent tax measures announced in budget
would have a 22bp negative impact on earnings, other things constant.
• Our view: While we are positive on the company’s growth potential, the current
valuation of 34x CY11E P/E looks fair; we would wait for better entry points.
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