29 July 2013
2QCY13 Results Update | Sector:
Consumer
Nestle India
BSE SENSEX
19,748
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
5,886
NEST IN
96.4
5865/4306
4/19/4
CMP: INR5,450
TP: INR5,300
Neutral
M.Cap. (INR b) / (USD b) 525.4/8.9
Financials & Valuation (INR B)
Y/E DEC
Net Sales
EBITDA
Adj PAT
Adj.EPS
(INR)
Gr. (%)
BV/S. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (X)
2012 2013E 2014E
83.0
18.3
11.0
114.1
9.9
186.5
75.1
59.6
47.8
29.2
96.0
21.3
12.5
129.8
13.8
245.1
60.2
58.4
42.0
22.2
114.1
25.4
15.5
160.4
23.6
308.2
58.1
64.3
34.0
17.7
In-line results:
Nestle India (NEST) posted in-line results for 2QCY13. Sales grew
11.4% to INR22.13b (our estimate: INR22.07b), EBITDA grew 11.3% to INR4.77b
(our estimate: INR4.83b), and PAT grew 12% to INR2.71b (our estimate:
INR2.73b). EBITDA margin was flat at 21.6% (our estimate: 22%); though gross
margin expanded 20bp to 54.8%, this was neutralized by higher employee costs.
Subdued consumption trend in core categories:
Domestic sales grew 9.2%.
Exports grew 47%, led by exports to affiliates. In its press release, the
management commented that sales growth was driven by pricing and volume
growth in some categories. Though volumes improved in some categories, driven
to an extent by low base, our checks suggest subdued consumption trend in core
categories.
Significant decline in net debt:
Capital costs were up 8.7% and depreciation
increased 31.7% due to capacity expansion. Interest cost declined 61.4% due to
lower leverage. Net debt declined from INR4.48b as at December 2012 to
INR963m as at June 2013. ECBs outstanding were flat YoY at USD192m.
Valuation and view:
We see downside risks to our estimates ahead, as underlying
consumption demand remains weak, more so in discretionary categories,
specifically Foods. The stock trades at 42x CY13E and 34x CY14E EPS. Valuations
are rich, given the context of slowdown in Consumer categories. For now, we
maintain our estimates and
Neutral
rating, with a revised target price of INR5,300
(33x CY14E EPS, 10% premium to ITC and in line with the multiple ascribed to
HUVR). We will review our numbers and rating post the analyst meet scheduled
for 30 July 2013. To meet our CY13 estimates, NEST needs to deliver 20.4% sales
growth, 20.7% EBITDA growth and 23.4% PAT growth.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Investors are advised to refer through disclosures made at the end of the Research Report.

Nestle India
Domestic sales up 9.2%; gross margins expand 20bp; EBITDA margins flat
2QCY13 Net sales grew 11.4% to INR22.13b (estINR22.07b), on account of price
increases, change in product mix and volume growth in some product
categories, as per management. Exports revenues grew 47% YoY to INR1.74b
due driven by exports to affiliates.
We estimate volume growth in Prepared Dishes segment (Noodles) and
continued weakness in Milk Products and Nutrition segment.
Gross margins expanded 20bp YoY to 54.8%; neutralized by higher employee
costs. Thus, the EBITDA margins for the quarter remained flat at 21.6% (est
22%).EBIDTA grew 11.3% to INR4.77b (est INR4.83b).
After many quarters of lull, Nestle has gradually upped the activity on
innovation/relaunch front and recently launched Alpino, premium chocolate at
a price of point of INR 25 for 2 balls, positioned vis-à-vis Ferrero Rocher. We
note that Cadbury has been growing at 20% plus CAGR for last three years in
Chocolates as against Nestle’s 9.5% over CY10-12 (volume decline of 5.5% cagr)
Capital costs up 8.7% - depreciation up 31.7% due to capacity expansion and
interest costs down 61.4% – due to reduction in leverage.
Nestle’s net debt has fallen from NR4.48b as on 31st Dec’12 to INR963mn as on
30th June’13. ECB outstanding of US$192mn remained flat YoY.
Tax rate increased 210bp to 33% due to rise in tax surcharge from 5% to 10% in
budget.
As a result, Adj PAT grew 12% to INR2.71b (est INR2.73b).
Reported PAT was up 10.3% due to write back of net provision for contingencies
(non operational) of INR 81.5mn.
1HCY13 performance: Sales, EBITDA and PAT up 10.6%, 14.3% and 8.9% growth,
respectively
Balance sheet highlights: Net debt declined from INR4.48bn in Dec’12 to INR
963m in June’13.
Leverage has come down sharply
INR M
Net worth
Loan Funds
Curr investments
Cash
Net Debt
D/E (X)
Net D/E (x)
CY10
8,554
0
1,507
2,553
-4,060
0.00
-0.47
CY11
12,740
9,709
1,344
2,272
6,093
0.76
0.48
1HCY12
17,957
13,777
2,567
2,515
8,695
0.77
0.48
CY12
17,984
10,502
3,649
2,370
4,484
0.58
0.25
1HCY13
23,492
11,495
5,845
4,687
963
0.49
0.04
Source: Company, MOSL
29 July 2013
2

Nestle India
Domestic sales up 9.2%...
…but yet to revert to glory days
Source: Company, MOSL
Source: Company, MOSL
Exports continue to report strong growth
Gross margins expand 20bps; EBITDA margin flat
Source: Company, MOSL
Source: Company, MOSL
Milk prices continue to remain inflationary
Sugar prices stable
Source: Company, MOSL
Source: Company, MOSL
Valuation and view
While 2QCY13 numbers were in-line with estimates, we see downside risks to
our estimates ahead as underlying consumption demand remains weak, more so
in discretionary and within that in Foods categories. Sustained macro weakness
clouds the near term growth visibility, notwithstanding the solid long term
processed foods opportunity and leading franchise of Nestle’s brands in its core
categories.
Stock trades at 42x CY13 and 34x CY14 EPS. We find the current valuations rich
given the context of slowdown in consumer categories
3
29 July 2013

Nestle India
For now we maintain our estimates and Neutral rating on the stock with a
revised TP of INR5,300 (33x CY14E, 10% premium to ITC and in-line with
ascribed multiple to HUVR).
We will review our numbers and rating post the analyst meet scheduled on
30th July.
We highlight the downside risks to our estimates for CY13 and CY14.
Nestle needs to deliver 20.4%, 20.7% and 23.4% Sales, EBITDA and PAT growth
to meet our CY13 estimates. Our channel checks and commentary from other
consumer companies which declared results does not suggest near term
demand revival.
Nestle 1 year forward PE band
Source: Company, MOSL
29 July 2013
4

Nestle India
Nestle India: an investment profile
Company description
Nestle India is the largest packaged food company in
India. A 63% subsidiary of Nestle S.A, the company has
a diversified portfolio with strong brands like Nescafe,
Everyday, Maggi etc. The company has taken up a huge
capacity expansion plan which will see it invest INR 25-
30b over the next 2-3 years to support its strong growth
trajectory.
Recent developments
Launched Alpino chocolate in the premium segment.
Acquired 26% stake in Indocon Agro.

Mr. Etienne Benet would take over as the Managing
Director of Nestle India Limited w.e.f. Oct 01, 2013
Valuation and view
Volume growth has been sub-par, and despite the
correction from the peak, we believe valuations
remain rich. The stock trades at 35.6x CY13E and
25.3x CY14E earnings.
We maintain our estimates and
Neutral
rating.
While the long-term processed foods opportunity is
attractive, stock outperformance hinges on revival
of volume growth
Key investments arguments
NEST is in a dominant position and best placed to
capture the huge opportunity in processed foods.
The company's strong pricing power and healthy
innovation pipeline enables profitable volume
growth.
Investment risks
Continued input cost pressure could impact margins
in the near term.
Steep
valuations
leave
little
room
for
disappointment.
Sector view
We have a cautious view on the sector on back of
inflationary pressure in the economy.
Companies with competitive position would be
better placed to withstand any slowdown in a
particular segment.
Longer term prospects bright, given rising incomes
and low penetration.
We prefer companies with earnings visibility in an
environment where consumption is moderating
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
Nestle
42.0
34.0
22.2
17.7
5.5
4.5
24.7
20.4
HUL
40.4
36.8
24.8
21.2
4.9
4.2
30.1
26.0
ITC
33.5
28.7
12.7
11.5
8 .0
6.9
21.7
18.8
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
129.8
160.4
Consensus
Forecast
125.4
147.3
Variation
(%)
3.5
8.9
Target price and recommendation
Current
Price (INR)
5,447
Target
Price (INR)
5,300
Upside
(%)
-2.7
Reco.
Neutral
Shareholding pattern (%)
June-13
Promoter
Domestic Inst
Foreign
Others
62.8
6.2
13.0
18.0
Mar-12
62.8
6.6
12.4
18.2
June-12
62.8
7.8
11.4
18.1
Stock performance (1-year)
29 July 2013
5

Nestle India
Financials and valuation
29 July 2013
6

Nestle India
NOTES
29 July 2013
7

Nestle India
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29 July 2013
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