Accumulate Nestle India; target of Rs 5110: Emkay

“Nestle Q1CY12 performance remains below expectation, largely led by lower then expected revenue performance. Revenues grew 13.1% yoy to Rs20.5 bn, lower then our expectations of Rs21.5 bn. It remains impacted by discontinuation of business channels (CSD business) and business (‘Eclairs’ in confectionary) and capacity constraints. Hence, the RIG growth remains muted in the quarter, our guesstimate is 5% yoy. Consequently, Ebidta at Rs4.4 bn (+17.4%) and APAT at Rs2.7 bn (+7.8%) is below expectation.”

“Domestic business featured over Exports business. Domestic business grew 13.7% yoy to Rs19.5 bn. This was impacted by channel mix optimization, but benefited from richer product mix. Whereas, Export business grew by mere 3.3% yoy to Rs1.1 bn, impacted by 10.1% yoy decline in sales to Nestle affiliates. Nestle gained from richer product mix alongside channel optimization and higher price realization in product portfolios. Consequently, gross margins expanded by 300 bps yoy to 54.2% and Ebidta margin expanded by 80 bps yoy to 21.7%. This translated into 17.4% yoy growth in Ebidta to Rs4.4 bn, partially offsetting lower revenue growth. Tax incentives in Pantnagar facility reduced from 100% of profits to 30% of profits. The tax outgo increased 290 bps yoy from 29% of PBT to 32% of PBT. This curtailed the APAT growth to 7.8% yoy in the quarter.”

“Significant re-rating in recent months despite lower earnings growth has resulted in premium valuations by discounting CY13E earnings at 36X. Though, out performance from CMP of Rs4940/Share is difficult, stock would find comfort in attractive FCF yield of 4% discounting - CY13E FCF of Rs18.9 bn. Also, Nestle is in-sync with our theme for preference for agri-sensitive input and urbancentric companies. We like Nestle, with its strong brand equity and market position and remain positive on the long term prospects of the company. Nestle would continue to command premium valuations, considering its strong business model and lack of listed players in the packaged food and beverage segment. We maintain our ACCUMULATE rating on the stock with a target price of Rs 5,110/share,” says Emkay Global Financial Services research report.  

Institutional holding more than 40% in Indian cos

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