HDFC Securities has recommended to book profits in Nestle and re-enter at lower levels, in its report dated September 15, 2008.

"With aggressive product launches, improved distribution reach, favourable demand scenario, we believe Nestle is poised to grow at a rapid pace in the future. Changing lifestyle, increasing number of nuclear families, changing consumer tastes, increasing disposable incomes could accelerate growth for Nestle. Earlier we had mentioned that usually second quarter on a sequential basis is a subdued quarter and we had expressed our concerns regarding Nestlé’s ability to combat the increasing raw material prices. The fall in the margins in the second quarter reaffirms our concerns and we believe that investors can take profits in the stock at these levels (with 15% upside for the fresh investors) ahead of the target price of Rs 1,850. Premium in valuation of defensive stocks have expanded in recent times as market P/E has shrunk, while Nestle’s P/E has remained constant. In a scenario where operating margins seems to be under pressure, this premium in valuation could narrow. We are still bullish on the medium term prospects of Nestle as its product range gives it a distinct position in the FMCG space and would advise investors to re - enter Nestle at a lower level in the coming months. At the current market price of Rs 1750, the stock is trading at a price/earnings ratio (PER) of 31x CY2008E EPS of Rs 56 and 25.8x CY2009E EPS of Rs 67.5" says HDFC Securities report.

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