Apr 17, 2013, 11.22 AM | Source: Moneycontrol.com
Motilal Oswal has maintained a neutral rating on Nestle India (NEST) with a target price of Rs 4,900 in its April 16, 2013 research report.
Motilal Oswal (more)
"NEST posted 0.8 percent volume growth in CY12 (6.8 percent in CY11), the lowest tonnage growth since 1998. Volumes were impacted by channel and portfolio rationalization initiatives, aggressive price hikes, as well as slowdown in Processed Foods. Except for Prepared Dishes (Maggi), which grew 8 percent, all other categories posted volume decline - Milk Products (-5 percent), Beverages (-5 percent) and Chocolates & Confectionery (-9.46 percent). Milk Products contributed 56 percent of incremental value growth while Prepared Dishes contributed 30.4 percent.
Gross margin expanded 250bp to 54.3 percent, led by (1) price increases and (2) mix improvement (exit from low-margin channels, products and SKUs). EBITDA margin expanded 150bp, as higher manufacturing costs (up 60bp) and staff costs (up 70bp) partially offset gross margin gains. Ad spends as a percentage of sales remained flat despite pressure on volumes.
NEST's CY12 capex of INR9.7b (v/s INR15.8b in CY11) largely completes the ongoing capacity expansion drive. It has expanded gross block by 2.4x since CY10 to INR44.3b. Its net leverage has declined 27 percent from 0.48x to 0.25x while its operating cash flow has expanded 46 percent (highest growth in 10 years) to INR16.9b, resulting in highest free cash generation in 10 years. We note that working capital change during CY12 has added a positive swing of INR2.7b to operating cash flows.
We have cut our EPS estimate by 1/1.8 percent for CY13/14. We now estimate EPS growth of 14.6 percent in CY13 and 21 percent in CY14. Recovery in volume growth remains the single critical parameter for NEST's re-rating. At 35.3x CY13E and 29.1x CY14E EPS, we believe valuations are rich amidst slowdown in discretionary processed foods. Maintain Neutral with target price of INR4,900," says Motilal Oswal research eport.
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