12 February 2016
Q4CY15 Results Update | Sector: Consumer
Nestle India
Neutral
BSE SENSEX
22,986
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm/ Vol m
Free float (%)
S&P CNX
6,981
NEST IN
96.4
487.6 / 7.5
7,500/5,010
0/-1/-6
448
37.2
CMP: INR5,057
TP: INR6,000(+19%)
Volume pain persists even ex-Maggi; gradual recovery ahead
Sales/EBITDA below estimates:
Net sales declined 22.6% YoY to INR19.5b (est.
INR21.3b). EBITDA declined 36% YoY to INR3.5b (est. INR3.9b) and adjusted PAT
declined 36.7% YoY to INR2.1b (est. INR2.1b). NEST booked an exceptional loss of
INR247m pertaining to stocks withdrawn from the market and consequent
incidental costs (storage, transportation and incineration costs). Exports declined
2.2% YoY, driven by
Maggi
issue and lower coffee exports. We note that
Maggi
Noodles was re-launched during the quarter on 9
th
November’2015. However, it
will take time before it covers the entire distribution reach of Nestle. Also, till date
only Masala variant of Maggi was available, it has now launched the Chicken
variant on 11
th
Feb’16. We expect sequential traction for Maggi to gather steam as
it rebuilds the equity and mindshare.
Reported gross margin expanded 310bps YoY to 58.5%.
Higher staff costs (up
370bps YoY to 13.1%) and other expenses (up 310bps YoY to 27.4%) resulted in
EBITDA margin contraction of 370bps YoY to 17.9% (est. 18.3%). EBITDA declined
36% YoY to INR3.5b (est. INR3.9b). Adjusted PAT declined 36.7% YoY to INR2.1b
(est. INR2.1b). Reported PAT declined 44% YoY to INR1.8b due to exceptional costs
of INR247m.
CY15 Highlights:
Sales declined 17.2% YoY to INR81b, EBITDA declined 22% YoY to
INR16b and Adj. PAT declined 21.4% YoY to INR9.8b. Net cash increased to
INR14.6b in CY15 from INR9.3b in CY14 due to increase in current investments.
Company has declared a final dividend of INR18.5/share – total dividend for CY14
stood at INR48.5/share vs. INR63/share in CY14.
Valuation and view:
We cut our estimates by 3-4% to account for the
topline/EBITDA misses. Volume growth for the portfolio (even adjusting for Maggi
issue) is flattish and reflects the underlying stress as well as competitive intensity in
Nestle’s portfolio. We like the focus of new CEO towards volume and also its
newfound aggression in some categories (price cuts/promotions in Dairy). Despite
the recent correction, stock is richly valued at 34x CY17E. Maintain
Neutral
with a
revised TP of INR6,000 [roll-over to CY17 – 40x CY17EPS].
Financials & Valuations (INR b)
Y/E Dec
2015 2016E 2017E
81.2
98.3 115.3
Net Sales
16.0
19.4
22.8
EBITDA
9.8
12.0
14.5
PAT
101.8 124.2 150.4
EPS (INR)
-21.3
21.9
21.1
Gr. (%)
300.8 311.4 324.0
BV/Sh (INR)
34.2
40.6
47.3
RoE (%)
43.1
52.9
61.9
RoCE (%)
49.7
40.7
33.6
P/E (x)
16.8
16.2
15.6
P/BV (x)
Estimate change
TP change
Rating change
3-4%
4%
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
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)

Nestle India
Key quarterly charts
Exhibit 1: Domestic sales declined 24% YoY impacted by the
MAGGI Noodles issue
Domestic Sales (INR b)
16.7
13.713.7
7.6 9.6 7.7 9.2 8.0
Sales Growth (%)
9.7 9.9 11.3 7.6
23.2
-24.0
-20.6
-33.8
Exhibit 2: …while Exports declined 2.2% affected by the
MAGGI Noodles issue and lower coffee exports
Exports Growth (%)
73.9
50.9 46.9
20.6
10.5
3.3 -1.1
20.9
-4.4
17.919.2
-3.9
-12.7
-6.4 -2.2
3.7 3.4
4.1
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: Reported gross margins expanded 310bps YoY
Gross Margins (%)
Exhibit 4: ..while
320bps YoY
reported
EBITDA
margin
contracted
EBITDA Margin (%)
Source: Company, MOSL
Source: Company, MOSL
Valuation and view
We cut our estimates 3-4% to account for the topline/EBITDA misses. Volume
growth for the portfolio (even adjusting for Maggi issue) is flattish and reflects
the underlying stress as well as competitive intensity in Nestle’s portfolio. We
like the focus of new CEO towards volume and also its newfound aggression in
some categories (price cuts/promotions in Dairy).
Despite the recent correction, stock is richly valued at 34x CY17E. Maintain
Neutral with a revised TP of INR6,000 [roll-over to CY17 – 40x CY17EPS].
Exhibit 5: Cut estimates by 3-5% to factor in topline/EBITDA miss
New
INR M
Net Sales
EBITDA
Adj PAT
2016E
98,289
19,409
11,973
2017E
115,308
22,821
14,500
2016E
101,176
19,948
12,340
Old
2017E
119,110
23,541
15,096
% Change
2016E
2017E
-2.9%
-3.2%
-2.7%
-3.1%
-3.0%
-3.9%
Source: Company, MOSL
12 February 2016
2

Nestle India
Exhibit 6: Nestle P/E (x)
73.0
58.0
43.0
28.0
13.0
35.1
19.4
40.8
PE (x)
Peak(x)
Avg(x)
68.4
Min(x)
Exhibit 7: Nestle P/E premium vs. Sensex
250
200
150
100
50
0
-50
112.5
Nestle PE Relative to Sensex PE (%)
LPA (%)
160.9
Source: Company, MOSL
Source: Company, MOSL
Exhibit 8:
Valuation
Metrics of coverage universe
Company
Consumer
Asian Paints
Britannia
Colgate
Dabur*
Emami*
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Jyothy Labs
Marico*
Nestle
Page Industries
Pidilite Inds.
Radico Khaitan
United Spirits
Retail
Jubilant Foodworks
Shopper's Stop
Titan Company
Reco
Neutral
Buy
Neutral
Neutral
Buy
Neutral
Buy
Neutral
Neutral
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Buy
Neutral
Neutral
Price
(INR)
856
2,569
837
247
1,057
1,208
5,760
811
300
264
228
5,057
10,248
583
96
2,327
968
349
356
Mkt Cap EPS Growth YoY (%)
(USD M) FY16E FY17E FY18E
12,040
4,518
3,338
6,376
3,519
6,028
3,552
25,723
35,378
701
4,317
7,148
1,676
4,382
187
4,959
931
421
4,636
27.0
49.8
7.1
15.0
15.1
24.5
20.0
5.0
2.7
26.4
25.8
-21.3
21.0
48.5
-3.0
LP
6.8
32.6
-7.2
15.1
18.9
14.3
16.2
22.6
20.0
15.6
10.9
10.4
-8.7
15.5
21.9
25.0
10.2
31.5
76.9
48.0
35.8
20.9
9.9
14.0
14.1
12.5
16.9
14.4
9.4
14.2
14.3
12.6
12.4
21.1
31.3
15.1
28.9
46.6
41.2
39.7
13.2
P/E (x)
EV/EBITDA (x)
ROE (%) Div. (%)
FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY16E
45.5
35.8
38.0
35.4
42.9
36.4
34.6
44.1
24.4
29.7
40.8
49.7
48.2
39.2
15.0
81.0
53.5
53.9
41.4
39.5
30.1
33.3
30.5
35.0
30.3
29.9
39.8
22.1
32.6
35.4
40.7
38.6
35.6
11.4
45.8
36.1
39.7
34.3
35.9
26.4
29.2
27.1
29.9
26.5
27.3
34.9
19.3
28.9
31.5
33.6
29.4
30.9
8.8
31.2
25.6
28.4
30.3
31.1
24.9
23.3
28.3
35.6
27.5
24.4
30.4
15.9
24.7
27.3
29.5
30.2
24.5
9.9
38.0
21.5
13.3
31.1
26.5
20.3
20.7
24.1
29.4
23.3
20.8
27.8
14.5
20.8
23.4
24.0
24.5
21.5
8.1
27.4
15.5
11.4
25.5
23.9
17.3
18.5
21.3
25.2
21.1
18.3
24.5
12.8
18.3
20.7
20.1
18.9
18.6
6.7
20.5
11.4
9.4
22.3
35.2
57.8
72.6
33.0
40.6
23.2
30.5
110.3
30.4
19.6
35.5
34.2
46.9
29.8
9.5
48.1
16.1
6.8
21.2
1.2
1.0
1.8
1.0
1.0
0.8
1.2
2.1
2.3
1.5
0.9
1.5
0.9
0.7
1.0
0.0
0.4
0.4
0.7
Note: For Nestle FY16E means CY15
Source: Company, MOSL
12 February 2016
3

Nestle India
Story in chart
Exhibit 9: Sales growth stood at 8% in CY14
30.0
20.0
10.0
0.0
-10.0
19.5
14.5
6.6
Price Growth (%)
Sales Growth (%)
23.922.6
16.8
11.4
4.1
11.4
11.4
22.120.3
11.8
9.3 8.0
53.0
Exhibit 10: Gross and EBITDA margin declined YoY in CY14
Gross Margin (%)
EBITDA Margin (%)
54.3
51.8
51.2
52.1
51.0
51.8
22.3
20.1
20.2
20.5
20.2
21.0
22.2
54.3
53.6
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 (%)
30.0
20.0
10.0
0.0
-10.0
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14
Source: Company, MOSL
9.4
Sales Growth (%)
22.6 23.0
19.2 20.1 20.7
Price Growth (%)
Exhibit 14: Prepared Dishes revenue growth has moderated
Volume Growth (%)
Sales Growth (%)
35.0
30.6
19.2
34.7
26.9
29.2
Price Growth (%)
15.2
5.5
12.4
25.0
15.0
5.0
(5.0)
24.9
12.8 11.0
9.7
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14
Source: Company, MOSL
12 February 2016
4

Nestle India
Financials and Valuations
Income Statement
Y/E Dec
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2010
62,547
21.9
12,497
20.0
1,278
11,408
11
427
0
11,635
3,264
28.1
0
8,187
8,370
20.0
2010
964
7,590
8,554
0
333
8,887
18,547
8,420
10,127
3,489
1,507
10,460
5,760
633
2,553
1,514
16,696
7,621
9,075
-6,236
8,887
2011
74,908
19.8
15,528
20.7
1,533
14,232
51
509
0
14,452
4,264
29.5
0
9,616
10,189
21.7
2011
964
11,775
12,740
9,709
502
22,950
25,522
9,765
15,758
13,718
1,344
13,199
7,340
1,154
2,272
2,432
21,067
10,095
10,972
-7,869
22,951
2012
83,023
10.8
18,257
22.0
2,772
15,808
266
633
0
15,852
4,847
30.6
0
10,679
11,006
8.0
2012
964
17,020
17,984
10,502
1,621
30,107
44,276
12,233
32,043
3,441
3,649
12,507
7,456
876
2,370
1,806
21,532
10,974
10,558
-9,025
30,107
2013
90,619
9.1
19,804
21.9
3,300
16,896
365
1,222
0
17,362
5,609
32.3
0
11,171
11,753
6.8
2013
964
22,723
23,687
11,872
2,155
37,714
49,032
15,339
33,693
2,947
8,511
17,992
7,359
843
7,494
2,296
25,429
11,356
14,073
-7,437
37,714
2014
98,063
8.2
20,527
20.9
3,375
17,638
142
1,359
0
18,368
5,897
32.1
0
11,847
12,472
6.1
2014
964
27,408
28,372
41
2,227
30,640
50,090
18,323
31,766
2,448
8,118
15,863
8,441
991
4,458
1,972
27,555
11,537
16,017
-11,692
30,640
2015
81,233
-17.2
15,987
19.7
3,420
13,437
35
1,621
0
14,103
4,727
32.5
0
5,633
9,798
-21.4
2015
964
28,037
29,001
600
2,369
31,970
50,733
21,744
28,989
2,448
10,176
18,309
8,394
1,061
6,691
2,162
27,952
9,185
18,767
-9,643
31,970
2016E
98,289
21.0
19,409
19.7
3,496
16,432
61
1,885
0
17,737
5,765
32.5
0
11,132
11,973
22.2
2016E
964
29,059
30,024
500
2,542
33,066
51,452
25,240
26,212
2,448
12,711
23,884
10,089
1,394
9,535
2,865
32,190
10,845
21,345
-8,306
33,065
(INR Million)
2017E
115,308
17.3
22,821
19.8
3,548
19,866
55
2,264
0
21,481
6,981
32.5
0
13,575
14,500
21.1
Balance Sheet
Y/E Dec
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
(INR Million)
2017E
964
30,279
31,243
500
2,751
34,494
52,259
28,789
23,470
2,448
15,852
30,116
11,859
1,634
13,259
3,364
37,392
12,619
24,774
-7,276
34,494
12 February 2016
5

Nestle India
Financials and Valuations
Ratios
Y/E Dec
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2010
86.8
100.1
88.7
48.5
55.9
58.2
50.5
57.0
7.7
38.7
1.0
2011
105.7
121.6
132.1
48.5
45.9
47.9
41.6
38.3
6.6
31.8
1.0
2012
114.1
142.9
186.5
48.5
42.5
44.3
35.4
27.1
5.9
27.0
1.0
2013
121.9
156.1
245.7
48.5
39.8
41.5
32.4
20.6
5.3
24.4
1.0
2014
129.4
164.4
294.3
63.0
48.7
39.1
30.8
17.2
4.8
23.1
1.2
2015
101.8
137.3
300.8
75.0
73.7
49.7
36.8
16.8
5.8
29.5
1.5
2016E
124.2
160.4
311.4
90.0
72.5
40.7
31.5
16.2
4.7
24.0
1.8
2017E
150.4
187.2
324.0
110.0
73.1
33.6
27.0
15.6
4.0
20.1
2.2
116.5
156.1
8.4
4
95.7
90.3
4.7
5
71.6
60.8
3.1
4
56.4
51.5
2.7
3
47.9
53.6
2.9
4
34.2
43.1
2.7
5
40.6
52.9
3.0
5
47.3
61.9
3.4
5
-0.3
2010
12,685
-493
1,397
-3,252
416
10,754
-4,832
5,922
526
0
-4,306
0
-6
0
-5,445
-5,451
997
1,556
2,553
0.6
2011
15,765
-426
882
-4,161
458
12,518
-17,204
-4,686
163
0
-17,041
0
9,709
0
-5,467
4,242
-281
2,553
2,272
0.5
2012
18,580
-626
996
-3,728
367
15,588
-8,476
7,112
-2,305
0
-10,781
0
793
0
-5,503
-4,710
97
2,272
2,369
0.2
2013
20,196
-585
2,916
-5,075
857
18,308
-4,262
14,046
-4,862
0
-9,125
0
1,370
0
-5,429
-4,059
5,124
2,370
7,494
-0.2
2014
21,013
-876
605
-5,824
1,217
16,135
-559
15,576
393
0
-166
0
-11,830
0
-7,173
-19,004
-3,035
7,494
4,458
-0.2
2015
16,858
-923
-581
-4,585
1,588
12,358
-643
11,715
-2,058
0
-2,701
0
559
0
-7,983
-7,424
2,232
4,458
6,690
-0.3
2016E
19,928
-519
667
-5,592
1,825
16,309
-720
15,589
-2,535
0
-3,255
0
-100
0
-10,109
-10,209
2,845
6,691
9,535
-0.4
Cash Flow Statement
Y/E Dec
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
2017E
23,414
-594
1,768
-6,772
2,209
20,025
-806
19,219
-3,140
0
-3,947
0
0
0
-12,356
-12,356
3,723
9,535
13,259
12 February 2016
6

Nestle India
Corporate profile
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 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Promoter
DII
FII
Others
Dec-15
62.8
5.4
14.9
17.0
Sep-15
62.8
4.9
12.2
20.2
Dec-14
62.8
4.7
13.8
18.7
Exhibit 3: Top holders
Holder Name
LIC of India
Arisaig Partners (Asia) PTE Ltd A/C Arisaig
India Fund Ltd
Aberdeen Global Indian Equity Fund
(Mauritius) Ltd
% Holding
2.5
1.9
1.6
Note: FII Includes depository receipts
Source: Capitaline
Source: Capitaline
Exhibit 4: Top management
Name
Suresh Narayanan
Shobinder Duggal
B Murli
Designation
Chairman & Managing Director
Director (Finance & Control)
Company Secretary
Exhibit 5: Directors
Name
Ashok Kumar Mahindra
Ravinder Narain
Aristides Protonotarios
Name
Rajya Vardhan Kanoria
Swati A Piramal
Source: Capitaline
Exhibit 6: Auditors
Name
A F Ferguson & Co
Ramanath Iyer & Co
Type
Statutory
Cost Auditor
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
CY16
CY17
MOSL
forecast
124.2
150.4
Consensus
forecast
129.8
159.9
Variation (%)
-4.3
-6.0
Source: Bloomberg
Source: Capitaline
12 February 2016
7

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12 February 2016
8