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Nestle India (NEST)
Consumer products
Are Nestle’s volumes growing well? Nestlé’s volume growth in 3QCY11 was likely
<5%. Weighted average retail prices of Nestlé’s products are up ~26% during June
2010–October 2011 (Exhibit 1 gives brand-wise details), as per our workings (it had
sales growth of 20% in 3QCY11). Capacity constraint is a probable reason for low
volumes, in our view. However, we do not agree with the Street’s views that demand
for Nestlé’s products is parabolic (on a tangent, Zydus Wellness’ 2QFY12 results
highlight the growth risks in emerging categories—growth in ‘Sugar Free’ has slowed
down to 6% from ~20% in FY2011). We do like the market opportunity for most of
Nestlé’s categories, but look for better entry points into the stock.
Over 30% price increase in most infant foods brands
Our analysis of Nestlé’s product prices suggests that it likely had muted volume growth in
3QCY11; likely <5%. Weighted average retail prices of Nestlé’s products are up ~26% during
June 2010–October 2011 (Exhibit 1), as per our workings (it had sales growth of 20% in
3QCY11). It had taken disproportionate and steep price increases in infant foods—Cerelac ~18%,
Lactogen ~32%, Nan ~35%, and Nestum ~29%. Retail prices of Everyday dairy whitener
(accounts for about 15% of sales) are up ~43%. Capacity constraint faced by Nestle—quite unlike
of Indian consumer companies—is the probable reason for price increases-led growth in CY2011.
We further highlight that it has defocused on certain channel sales—exports, sales to Canteen
stores department (sales to defence personnel).
Nestle is utilizing the incumbency advantage in infant foods to its best, in our view
The steep price hikes in all categories, particularly so in infant foods, indicate that Nestle is utilizing
the incumbency advantage to its best (near monopoly in infant foods as advertisements are
banned). Price increases ahead of cost inflation (and hence gross margin expansion) are a likely
tool adopted by the company for P&L management, in our view. While this poses upside risks to
our near-term estimates in the event of significant correction in input costs (let’s say if milk and
milk powder prices are to potentially correct), we are negatively surprised at the price-led strategy
adopted by the company when most of its categories are perceived to be under-penetrated.
At 36X CY2012E and at a 15-year high relative P/E, retain SELL
While we like the market opportunity for most of Nestlé’s categories, we recommend waiting for
better entry points into the stock (it trades at a 15-year high relative P/E versus BSE-30 index P/E).
At 36X CY2012E P/E, there is no room for execution risks. Retain SELL rating and target price of
Rs3,600 (valued at 29X CY2012E). Key risks to our rating are (1) higher-than-expected sales
growth due to distribution gains, and (2) better than-expected margin expansion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nestle India (NEST)
Consumer products
Are Nestle’s volumes growing well? Nestlé’s volume growth in 3QCY11 was likely
<5%. Weighted average retail prices of Nestlé’s products are up ~26% during June
2010–October 2011 (Exhibit 1 gives brand-wise details), as per our workings (it had
sales growth of 20% in 3QCY11). Capacity constraint is a probable reason for low
volumes, in our view. However, we do not agree with the Street’s views that demand
for Nestlé’s products is parabolic (on a tangent, Zydus Wellness’ 2QFY12 results
highlight the growth risks in emerging categories—growth in ‘Sugar Free’ has slowed
down to 6% from ~20% in FY2011). We do like the market opportunity for most of
Nestlé’s categories, but look for better entry points into the stock.
Over 30% price increase in most infant foods brands
Our analysis of Nestlé’s product prices suggests that it likely had muted volume growth in
3QCY11; likely <5%. Weighted average retail prices of Nestlé’s products are up ~26% during
June 2010–October 2011 (Exhibit 1), as per our workings (it had sales growth of 20% in
3QCY11). It had taken disproportionate and steep price increases in infant foods—Cerelac ~18%,
Lactogen ~32%, Nan ~35%, and Nestum ~29%. Retail prices of Everyday dairy whitener
(accounts for about 15% of sales) are up ~43%. Capacity constraint faced by Nestle—quite unlike
of Indian consumer companies—is the probable reason for price increases-led growth in CY2011.
We further highlight that it has defocused on certain channel sales—exports, sales to Canteen
stores department (sales to defence personnel).
Nestle is utilizing the incumbency advantage in infant foods to its best, in our view
The steep price hikes in all categories, particularly so in infant foods, indicate that Nestle is utilizing
the incumbency advantage to its best (near monopoly in infant foods as advertisements are
banned). Price increases ahead of cost inflation (and hence gross margin expansion) are a likely
tool adopted by the company for P&L management, in our view. While this poses upside risks to
our near-term estimates in the event of significant correction in input costs (let’s say if milk and
milk powder prices are to potentially correct), we are negatively surprised at the price-led strategy
adopted by the company when most of its categories are perceived to be under-penetrated.
At 36X CY2012E and at a 15-year high relative P/E, retain SELL
While we like the market opportunity for most of Nestlé’s categories, we recommend waiting for
better entry points into the stock (it trades at a 15-year high relative P/E versus BSE-30 index P/E).
At 36X CY2012E P/E, there is no room for execution risks. Retain SELL rating and target price of
Rs3,600 (valued at 29X CY2012E). Key risks to our rating are (1) higher-than-expected sales
growth due to distribution gains, and (2) better than-expected margin expansion.
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