Thursday, April 26, 2012


Gearing up for growth

Nestlé India's performance has been below expectations with a further slowdown in volume growth during 1QCY12 due to substantial price hikes (13%). However, going ahead, over the next six months, we believe that it would post a recovery in volumes with ramp up in marketing
spends and increase in distribution. Additionally, the rising awareness for nourishment in the rural markets augurs well for the long-term growth plans of the company. We maintain a HOLD recommendation.

 Net sales grew by 13.1% to INR20.5bn in the backdrop of a 13.7% growth in domestic sales at INR19.5bn and 3.3% growth in export sales at INR1.01bn. In our view domestic volume growth during the quarter has been almost flat.

 EBITDA grew by 19% to INR4.57bn and EBITDA margin expanded by 104bps to 22.3%. The improvement in EBITDA margin was on account of 301bps drop in raw material cost to 45.8%. However, this improvement in EBITDA margin was below our expectations due to a 90bps increase in staff cost to 7.6% of net sales and 107bps increase in other expenses to 24.3% of net sales. The increase in staff cost has been due to increase in headcount to support the company's expansion initiatives. Additionally, the increase in other expenditure we believe has been because of ramp up in marketing expenditure.

 Profit before tax grew by 14% to INR4.16bn while recurring PAT grew at a lower rate of 10% to INR2.9bn due to an increase in effective tax rate by 248bps to 30.6% of PBT.

 Our channel checks suggest a substantial increase in marketing initiatives to fuel strong growth in sales during the next three years backed by the capacity expansion. Therefore, we believe that volume growth will recover over a period of six months led by the substantial ramp up in operations and subsiding of the impact of the price hikes. Additionally, the company's medium to long-term growth potential remains strong with rising awareness of nourishment even in the rural markets. 

Valuation and outlook
At the CMP of INR4,938, the stock is trading at a PE of 40.5x CY12e and 33x CY13e. We believe that Nestlé India would witness a strong recovery in sales momentum during CY13e backed by the ramp up in production and distribution. We therefore upgrade our EPS estimates by 2.4% for CY13e to INR149.8. We maintain our HOLD recommendation on the stock at the current levels with a target price of INR4,495.