29 July 2015
2QCY15 Results Update | Sector:
Consumer
Nestle India
BSE SENSEX
27,563
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val INRm/Vol ‘000
Free float (%)
Financials & Valuation (INR B)
Y/E DEC
Sales
EBITDA
Adj. PAT
2014 2015E 2016E
98.1
20.6
12.6
85.5
18.3
10.9
99.3
21.4
13.2
137.3
21.3
267.2
50.1
66.2
44.8
23.0
S&P CNX
8,375
NEST IN
96.4
592.7/9.3
7,500/5,005
4/-9/13
332/53
37.2
CMP: INR6,147
TP: INR5,750 (-6%)
Neutral
Adj. EPS(INR) 130.2 113.2
EPS Gr. (%) 6.8 -13.1
BV/Sh.(INR) 294.3 280.7
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
48.2
53.9
47.2
20.9
39.4
52.3
54.3
21.9
Estimate change
TP change
Rating change
Marred by Maggi; underlying volume weakness persist even ex-Maggi
n
Nestle’s reported 2QCY15 performance was marred by issues pertaining to Maggi
recall. Net sales declined 20.1% YoY to INR19.3b (est. INR22.3b). During the
quarter net sales of INR2.88b was reversed pertaining to Maggi Noodles stocks
being withdrawn from trade partners and market. EBITDA and Adjusted PAT came
in at INR3.6b (down 26% YoY, est. of INR4.6b) and INR2.3b (down 22% YoY, est. of
INR2.8b), resp. Nestle booked an exception loss of INR 4.5b pertaining to stocks
withdrawn from the market and consequent incidental costs (storage,
transportation and incineration costs). Exports declined 12.7% YoY driven by lower
coffee exports to Russia. Even adjusted for Maggi, rest of the portfolio would have
posted 3-4% revenue decline, per our estimates.
n
In a conference call management highlighted that typical EBITDA margin analysis
for 2QCY15 will not be relevant as certain expenses in P&L line item above EBITDA
have been classified in exceptional items due to accounting regulations and
therefore reported margins are overstated to that extent. Reported gross margins
expanded 330bp YoY to 55.8%. Lower absorption of fixed costs due to reduced
sales resulted in Reported EBITDA margin contraction of 150bp YoY to 18.6%. Thus
EBITDA posted 26.1% decline YoY to INR3.6b (est. INR 4.6b). Adjusted PAT
declined 22% YoY to INR2.3b (est. INR2.8b). Reported PAT posted loss of INR644m
due to exceptional costs of INR 4.5b.
n
Valuation and view:
We cut our estimates by 3-5% to incorporate 2QCY15 miss.
While we expect Nestle to eventually address the regulatory issues around Maggi,
uncertainty around the timelines will keep the near term estimates volatile. Given
the context of weak volume growth (even adjusting for Maggi issue), we find
valuations expensive at 54.3x CY15E and 44.8x CY16E EPS. While we appreciate
that near term P/E will look expensive due to depressed near term profits owing
to Maggi issue, the rest of the portfolio volumes are also not picking up. Thus, we
maintain
Neutral
with a revised target price of INR5,750 (38x CY16E EPS, 5-year
average P/E).
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
/ Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com)
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Nestle India
Key quarterly charts
Exhibit 1: Domestic sales declined 20.6% YoY; INR 2.9b of
sales return
20.9
20.7
16.713.7
13.7
Domestic Sales (INR m)
7.6 9.6 7.7 9.2 8.0
Sales Growth (%)
9.7 9.9 11.3 7.6
23.2
11.0
4.6
-20.6
3.3
10.5
20.6
-4.4
Exhibit 2: …with Exports posting 12.7% decline
Exports Growth (%)
73.9
50.9
46.9
20.9
4.1
-3.9
-12.7
17.9 19.2
3.7 3.4
-1.1
Source: MOSL, Company
Source: MOSL, Company
Exhibit 3: Reported gross margins expanded 330bp YoY
Gross Margins (%)
57.6
55.4
55.254.854.855.0
54.6
54.354.2
54.1
53.9
53.453.7
52.4
51.8
55.8
Exhibit 4: ..while reported EBITDA margin contracted 150bp
YoY due to lower absorption of fixed costs
EBITDA Margin (%)
24.0
23.7
23.0
22.3
22.0
22.0
21.6
21.020.821.0
21.0
20.9
20.921.1
20.1
19.5
18.6
Source: MOSL, Company
Source: MOSL, Company
Conference Call Highlights
n
Lower sales drove lower absorption of fixed costs.
n
Nestle recalled 23,000 tonnes of Maggi in June’July. Minor quantities may still
be recalled however company believes bulk of the recall process is now behind.
n
Maggi posted INR 25b of sales in CY14 and sold 224,000 tonnes in CY14.
n
Exceptional cost includes cost of Maggi noodles stock, incidental costs related to
withdrawal (transportation, storage, handling, destruction costs) and other
charges (lab testing costs, legal charges)
rd
n
Break-up of INR 4.5b of exceptional item: 2/3 of this cost was already incurred
(sales could not be done while RM processing etc already accounted – cost of
production). 1/3
rd
of the cost was incurred due to the Maggi issue.
n
Recall exercise involved 800 people, 14 additional warehouses, 200k sqft of
space and costs pertaining to them.
n
Nestle is co-operating with authorities to bring Maggi noodles back on shelf.
29 July 2015
2

Nestle India
Valuation and view:
We cut our estimates by 3-5% to incorporate 2QCY15 miss.
While we expect Nestle to eventually address the regulatory issues around Maggi,
uncertainty around the timelines will keep the near term estimates volatile.
Company has recently appointed Mr. Suresh Narayanan as the new MD w.e.f 1
st
August – first Indian MD in 17 years. We view this as an incremental positive for
Nestle. Given the context of continued weak volume growth (even adjusting for
Maggi issue), we find valuations expensive at 54.3x CY15E and 44.8x CY16E EPS.
While we appreciate that near term P/E will look expensive due to depressed near
term profits owing to Maggi issue, the rest of the portfolio volumes are also not
picking up. We maintain
Neutral
with a revised target price of INR5750 (38x CY16E
EPS, 5-year average P/E).
Exhibit 5: Revised estimates by 2-3% to factor in 1Q beat and benign input costs
INR M
Net Sales
EBITDA
Adj PAT
New
2015E
85,489
18,258
10,912
Old
2016E
99,262
21,421
13,240
2015E
88,363
18,767
11,181
2016E
102,633
22,766
14,012
% Change
2015E
2016E
-3.3
-3.3
-2.7
-5.9
-2.4
-5.5
Source: Company, MOSL
Exhibit 6: Nestle P/E (x)
73.0
58.0
43.0
28.0
13.0
33.1
19.4
PE (x)
Peak(x)
Avg(x)
Min(x)
60.0
45.6
Exhibit 7:
Nestle
P/E premium vs. Sensex
250
200
150
100
50
0
-50
Nestle PE Relative to Sensex PE (%)
LPA (%)
172.1
106.9
Source: Company, MOSL
Source: Company, MOSL
Exhibit 8: Valuation Matrix of coverage universe
Company
Consumer
Asian Paints
Britannia
Colgate
Dabur*
Emami*
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Jyothy Labs
Marico*
Nestle
Pidilite Inds.
Radico Khaitan
United Spirits
Retail
Jubilant Foodworks
Shopper's Stop
Titan Company
Reco
Buy
Buy
Neutral
Neutral
Buy
Neutral
Neutral
Neutral
Neutral
Buy
Neutral
Neutral
Neutral
Buy
Buy
Buy
Neutral
Neutral
Price
(INR)
847
2,969
2,075
290
1,267
1,251
6,214
900
304
310
430
6,147
558
92
3,656
1,850
407
339
P/E (x)
EV/EBITDA (x)
ROE (%) Div. (%)
Mkt Cap EPS Growth YoY (%)
(USD M) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15
FY15
12,718
5,554
4,419
7,990
4,503
6,665
4,093
30,482
37,862
879
4,345
9,283
4,482
190
8,322
15.8 31.4
45.1 37.8
13.9 18.3
15.7 22.2
21.7 25.1
22.0 30.6
-13.5 23.2
6.4 15.3
9.8 11.3
-7.5 108.0
18.1 21.2
6.8 -13.1
9.9 32.3
-10.4 8.6
Loss -165.6
64.3
60.5
10.8
23.4
18.1
21.5
17.1
22.0
25.6
20.5
19.1
13.4
-9.6
24.4
21.3
16.6
21.8
82.2
42.5
44.6
22.8
57.1 43.4
62.0 45.0
50.5 42.7
47.9 39.2
58.7 46.9
46.9 35.9
44.8 36.3
51.4 44.6
25.1 22.5
71.0 34.1
48.4 39.9
47.2 54.3
54.8 41.4
16.1 14.8
-77.5 118.2
98.0
83.2
36.5
59.6
51.8
33.0
35.2
38.1
35.1
33.4
38.5
28.6
30.2
37.4
19.9
37.7
32.1
44.8
35.6
12.1
64.9
41.8
35.8
26.9
38.8
44.9
33.8
38.5
51.9
32.5
33.1
37.0
16.8
40.1
31.8
28.1
36.3
11.6
74.2
45.9
18.3
27.8
29.3
30.9
27.7
31.2
40.4
25.4
25.9
30.9
15.1
27.1
25.8
31.3
26.3
9.8
55.2
29.2
14.7
24.9
23.6
25.8
22.2
26.4
32.8
20.4
21.2
26.1
13.3
22.5
20.6
26.5
22.4
8.2
37.9
21.2
12.0
19.9
32.4
56.4
88.0
35.5
45.3
21.4
29.6
108.1
34.8
16.6
33.5
48.2
23.1
8.6
-21.7
18.8
5.4
27.2
0.9
0.5
1.5
0.8
0.6
0.6
0.9
1.7
2.4
1.3
0.6
1.0
0.6
0.9
0.0
0.1
0.2
0.8
1,895 4.5
524 8.1
4,712 11.1
Note: For Nestle FY15 means CY14
29 July 2015
Source: Company, MOSL
3

Nestle India
Story in chart
Exhibit 9: Sales growth improved primarily on pricing actions
30.0
20.0
10.0
0.0
-10.0
19.5
20.1
20.2
20.5
20.2
14.5
6.6
Price Growth (%)
Sales Growth (%)
23.9 22.6
22.120.3
16.8
11.4
11.8
11.4
9.3 8.0
Exhibit 10: Gross and EBITDA margin declined YoY in FY14
Gross Margin (%)
53.0
51.8
51.2
EBITDA Margin (%)
54.3
54.3
53.6
51.0
51.8
22.3
21.0
22.2
11.4
4.1
52.1
21.4
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14
Source: Company, MOSL
Source: Company, MOSL
Exhibit 12: Milk Products contribution to revenues improved
Exhibit 11: Rising volume contribution of Prepared Dishes (%) in CY14 (%)
Milk Products/ Nutrition
Prepared Dishes
12.4
43.6
6.5
37.6
CY09
12.8
46.3
6.3
34.6
CY10
11.8
49.1
6.0
33.2
CY11
Beverages
Chocolate & Conf.
10.6
52.6
5.6
31.2
CY12
10.2
53.5
6.0
30.3
CY13
9.0
55.8
5.4
29.7
CY14
14.8
25.6
15.4
44.3
CY09
Milk Products/ Nutrition
Prepared Dishes
15.3
27.1
14.1
43.5
CY10
14.3
28.1
13.9
43.7
CY11
Beverages
Chocolate & Conf.
13.6
28.3
13.1
45.0
CY12
13.7
28.8
14.1
43.4
CY13
12.4
29.2
13.2
45.2
CY14
Source: Company, MOSL
Source: Company, MOSL
Exhibit 13: Milk Products grew in CY14 on soft base
Volume Growth (%)
Price Growth (%)
Sales Growth (%)
Exhibit 14: Prepared Dishes revenue growth has moderated
Volume Growth (%)
Sales Growth (%)
35.0
30.6
19.2
34.7
Price Growth (%)
30.0
20.0
10.0
0.0
-10.0
9.4
22.6 23.0
19.2 20.1 20.7
15.2
5.5
26.9 29.2 24.9
12.8 11.0
9.7
12.4
25.0
15.0
5.0
(5.0)
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14
Source: Company, MOSL
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14
Source: Company, MOSL
29 July 2015
4

Nestle India
Financials and valuations
Income Statement
Y/E December
Net Sales
Change (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Ch.
Other Inc.- Rec.
PBT
Change (%)
Margin (%)
Tax
Tax
Deferred Tax
Tax Rate (%)
Adjusted PAT
Change (%)
Margin (%)
Non-rec. (Exp)/Inc.
Reported PAT
Balance Sheet
Y/E December
Share Capital
Reserves
Net Worth
Loans
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Investments
Current
Non-current
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Curr. Assets
Def. Tax Liability
Appl. of Funds
E: MOSL Estimates
29 July 2015
2010
62,547
21.9
50,051
12,497
20.8
20.0
1,278
11
427
11,635
21.2
18.6
3,264
3,252
13
28.1
8,370
20.0
13.4
184
8,187
20.9%
2011
74,908
19.8
59,381
15,528
24.3
20.7
1,533
51
509
14,452
24.2
19.3
4,264
4,161
102
29.5
10,189
21.7
13.6
573
9,616
2012
83,023
10.8
64,766
18,257
17.6
22.0
2,772
266
633
15,852
9.7
19.1
4,847
3,728
1,119
30.6
11,006
8.0
13.3
327
10,679
2013
90,619
9.1
70,815
19,804
8.5
21.9
3,300
365
1,222
17,362
9.5
19.2
5,609
5,075
534
32.3
11,753
6.8
13.0
582
11,171
2014
98,063
8.2
77,450
20,612
4.1
21.0
3,375
142
1,359
18,454
6.3
18.8
5,897
5,824
73
32.0
12,557
6.8
12.8
710
11,847
2015E
85,489
-12.8
67,231
18,258
-11.4
21.4
3587
35
1,530
16,166
-12.4
18.9
5,254
5,096
158
32.5
10,912
-13.1
12.8
764
10,148
(INR Million)
2016E
99,262
16.1
77,841
21,421
17.3
21.6
3,580
61
1,834
19,615
21.3
19.8
6,375
6,184
191
32.5
13,240
21.3
13.3
841
12,399
(INR Million)
2016E
964
24,794
25,758
500
26,258
49,890
25,490
24,400
2,448
12,459
7,928
4,532
25,850
8,798
1,408
12,970
2,673
36,322
7,187
4,112
25,023
-10,473
-2,576
26,258
2010
964
7,590
8,554
0
8,554
18,547
8,420
10,127
3,489
1,507
1,507
0
10,460
5,760
633
2,553
1,514
16,696
7,454
167
9,075
-6,236
-333
8,554
2011
964
11,775
12,740
9,709
22,448
25,522
9,765
15,758
13,718
1,344
1,344
0
13,199
7,340
1,154
2,272
2,432
21,067
4,808
5,287
10,972
-7,869
-502
22,448
2012
964
17,020
17,984
10,502
28,486
44,276
12,233
32,043
3,441
3,649
3,649
0
12,507
7,456
876
2,370
1,806
21,532
5,394
5,580
10,558
-9,025
-1,621
28,486
2013
964
22,723
23,687
11,872
35,559
49,032
15,339
33,693
2,947
8,511
6,270
2,241
17,992
7,359
843
7,494
2,296
25,429
6,330
5,026
14,073
-7,437
-2,155
35,559
2014
964
27,408
28,372
41
28,413
50,090
18,323
31,766
2,448
8,118
5,074
3,045
15,863
8,441
991
4,458
1,972
27,555
7,287
4,250
16,017
-11,692
-2,227
28,413
2015E
964
26,098
27,062
600
27,662
48,184
21,910
26,273
2,448
10,056
6,342
3,714
22,578
7,497
1,092
11,952
2,037
31,309
6,070
3,543
21,696
-8,730
-2,385
27,662
5

Nestle India
Financials and valuations
Ratios
Y/E December
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
Cash Flow Statement
Y/E December
OP/(loss) before Tax
Int./Div. Received
Depn. and Amort.
Interest Paid
Direct Taxes Paid
Incr in WC
CF from Operations
Incr in FA
Free Cash Flow
Pur of Investments
CF from Invest.
Incr in Debt
Dividend Paid
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
29 July 2015
2010
86.8
100.1
88.7
48.5
55.9
2011
105.7
121.6
132.1
48.5
45.9
2012
114.1
142.9
186.5
48.5
42.5
2013
121.9
156.1
245.7
48.5
39.8
2014
130.2
165.2
294.3
63.0
48.4
2015E
113.2
150.4
280.7
102.0
90.1
2016E
137.3
174.5
267.2
122.0
88.8
70.8
61.4
9.4
47.1
69.3
0.8
58.2
50.6
8.0
38.6
46.5
0.8
53.9
43.0
7.2
32.7
33.0
0.8
50.4
39.4
6.5
29.7
25.0
0.8
47.2
37.2
5.9
28.1
20.9
1.0
54.3
40.9
6.7
31.3
21.9
1.7
44.8
35.2
5.7
26.5
23.0
2.0
116.5
156.1
95.7
90.3
71.6
60.8
56.4
51.5
48.2
53.9
39.4
52.3
50.1
66.2
3.6
8.4
5.5
4.7
3.7
3.1
3.3
2.7
3.6
2.9
4.5
2.8
5.0
3.4
0.0
0.8
0.6
0.5
0.0
0.0
0.0
(INR Million)
2016E
17,841
1,834
3,580
61
6,184
-1,920
18,931
1,706
17,225
2,403
-4,109
-100
13,704
0
-13,804
1,018
11,952
12,970
2010
11,219
427
974
11
3,252
-1,397
10,754
4,832
5,922
-526
-4,306
-6
5,448
3
-5,451
997
1,556
2,553
2011
13,994
509
1,345
51
4,161
-882
12,518
17,204
-4,686
-163
-17,041
9,709
5,435
-32
4,242
-281
2,553
2,272
2012
15,485
633
2,468
266
3,728
-996
15,588
8,476
7,112
2,305
-10,781
793
5,435
-68
-4,710
97
2,272
2,369
2013
16,505
1,222
3,106
365
5,075
-2,916
18,308
4,262
14,046
4,862
-9,125
1,370
5,471
42
-4,059
5,124
2,370
7,494
2014
17,237
1,359
2,985
142
5,824
-605
16,220
559
15,661
-393
-166
-11,830
7,106
-152
-19,089
-3,035
7,494
4,458
2015E
14,671
1,530
3,587
35
5,096
-3,768
18,424
-1,906
20,330
1,938
-32
559
11,457
0
-10,898
7,494
4,458
11,952
6

Nestle India
Corporate profile: Nestle India
Company description
Nestle India is the largest packaged food company
in India. A subsidiary of Nestle S.A (63% share), the
company has a diversified portfolio with strong
brands like Maggi, Nescafe, Everyday, etc.
Exhibit 15: Sensex rebased
Exhibit 16: Shareholding pattern (%)
Jun-15
Promoter
DII
FII
Others
62.8
4.4
12.7
20.2
Mar-15
62.8
4.5
12.5
20.2
Jun-14
62.8
5.1
14.5
17.7
Exhibit 17: Top holders
Holder Name
LIC of India
Arisaig Partners (Asia) PTE Ltd A/C Arisaig India Fund
Aberdeen Global Indian Equity Fund (Mauritius) Ltd
% Holding
2.3
1.9
1.7
Note: FII Includes depository receipts
Exhibit 18: Top management
Name
Antonio Helio Waszyk
Etienne Benet
Designation
Chairman (Non-Executive)
Managing Director
Exhibit 19: Directors
Name
Antonio Helio Waszyk
Etienne Benet
Ravinder Narain*
Swati A Piramal*
Michael W O Garrent*
*Independent
Name
Ashok Kumar Mahindra*
Shobinder Duggal
Aristides Protonotarios
Rajya Vardhan Kanoria*
Exhibit 20: Auditors
Name
A F Ferguson & Co
Ramanath Iyer & Co
Type
Statutory
Cost Auditor
Exhibit 21: MOSL forecast v/s consensus
EPS
(INR)
CY15
CY16
MOSL
forecast
113.2
137.3
Consensus
forecast
131.3
155.4
Variation
(%)
-13.8
-11.6
29 July 2015
7

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