1 August 2013
Update | Sector: Consumer
Nestle India
BSE Sensex
19,346
S&P CNX
5,742
CMP: INR5,295
TP: INR5,000
Neutral
No change in strategy; weak revenue growth visibility
Cutting estimates and target price; maintain Neutral
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
NEST IN
96.4
5,865/4,306
5/14/6
510.5
8.4
Financial Snapshot (INR Billion)
Y/E Dec
2012 2013E 2014E
Net Sales
83.0 94.4 110.3
EBITDA
Adj PAT
EPS (INR)
Growth (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
18.3
11.0
9.9
71.6
59.6
47.8
29.2
20.8
12.1
10.4
58.9
56.9
43.3
22.6
24.4
14.8
21.8
57.0
62.8
35.5
18.3
114.1 125.9 153.3
186.5 241.2 297.2
We attended Nestle India’s (NEST) analyst meet. Our key takeaways:
Processed Foods opportunity remains attractive:
NEST believes that the
long-term opportunity in Processed Foods (currently at USD30b) remains
attractive, notwithstanding the near-term demand weakness.
Not to chase volumes at the expense of profits:
NEST will not chase
volumes at the expense of profits; to compensate for the loss of profit
margins, even higher sales growth would be required later, the
management believes.
Weeding out LUPs – the right thing to do?:
The management believes that
weeding out low unit packs (LUPs) was the right thing to do – the value
proposition of LUPs was not satisfactory and NEST was not making enough
margins to invest in the brands. We disagree. We believe that in
underpenetrated premium categories, LUPs helped capture threshold
consumers for NEST, driving 21% revenue CAGR over CY07-11.
Beverages category doing well:
The management admitted that excessive
price hikes and underestimating the competitor were key mistakes in Dairy
Whitener, which has been a drag on its Milk & Nutrition segment. In
Chocolates, NEST underperformed Cadbury’s
Perk;
the management
believes competition has given disproportionate discounts. NEST has
recently launched
Alpino
at the INR25/unit price point in 68 towns.
Valuation and view
1HCY13 performance:
Overall domestic volumes grew 1.6%. Volumes
declined 4.9% in Milk & Nutrition, declined 3.3% in Chocolates, grew 6.5%
in Prepared Dishes, and grew 6.5% in Beverages. Portfolio rationalization
impacted these categories by -2%, -4.3%, -4.6% and -2%, respectively.
Growth could be impacted:
NEST’s price-led growth strategy could be a
dampener in an environment of slowing discretionary consumption.
Intensifying competition in its core categories (Cadbury in Chocolates, ITC in
Noodles, ITC and Danone in Dairy) could create roadblocks, unless NEST
refocuses on volume growth. Driving premiumization, while good for the
P&L, could hurt recruitment of new consumers in the absence of LUPs.
Cutting estimates:
We are cutting our estimates by 3-4% as we revise our
revenue assumptions downwards to reflect the weak discretionary
consumption environment. We now estimate 15.3% sales CAGR over CY13-
15 (17.2% earlier) and 15.9% EPS CAGR (19% earlier).
Maintain Neutral:
We believe current valuations of 35.5x CY14E EPS leave
little upside. Maintain
Neutral
with a target price of INR5,000 (33x CY14E
EPS). We would watch for new launches driven by NEST’s expanded
capacities in the near to medium term. Revival in discretionary processed
foods consumption and softening of competitive intensity are key risks.
Shareholding pattern % (Jun-13)
Jun-13 Mar-13 Jun-12
Promoter
Dom. Inst
Foreign
Others
62.8
6.2
13.0
18.0
62.8
6.6
12.4
18.2
62.8
7.8
11.4
18.1
Stock Performance (1-year)
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.