Sell Nestle India; target Rs 3578: PINC Research

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Sell Nestle India; target Rs 3578: PINC Research

PINC Research is bearish on Nestle India and has recommended sell rating on the stock with a target price of Rs 3578 in its November 4, 2011 research report.

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RELATED NEWS Sell Nestle India; target of Rs 3975: KRChoksey Buy Axis Bank; target Rs 1145: IIFL Buy United Bank of India; target Rs 82: Angel Broking ALSO READ See previous views by PINC Research See what other Experts & Brokerages are saying about Nestle See messages about Nestle Nestle BSE | NSE 01/06/12 Are Mutual Funds betting on Nestle?

PINC Research is bearish on Nestle India and has recommended sell rating on the stock with a target price of Rs 3578 in its November 4, 2011 research report.

"Nestle India reported 20% net sales growth which was in line with our expectation. Gross margin expanded by 93bps YoY and 130bps QoQ due to softening of commodity prices and price hike on couple of brands. Commissioning of Maggi plant in Nanjangud has led to rise in staff cost by 37% YoY. While EBITDA margin has expanded by 68bps YoY and 139bps QoQ on account of improvement in gross level profitability and slower growth in other expenses. Higher tax burden has resulted 24% EBITDA growth into 18% growth in net profits to Rs 2,620mn (PINCe Rs 2,540mn)."

"Nestle's net sales growth of 20% includes 21% growth in the domestic market while exports were grew merely 4.6% owing to the ban on exports of milk powder. We believe sales growth was equally benefited through growth in price and volume. We expect aggressive marketing efforts would help maintaining healthy volume growth. EBITDA growth of 24% during Q2CY11 was higher as compared to 20% growth during H1CY11. Softening of commodity prices and favorable revenue mix helped in achieving this growth. However, we maintain our ~21% EBITDA growth assumption for CY11 and CY12. Tax burden would slightly reduce growth at net level in CY11 and CY12."

"Nestle's monopoly in Maggi noodles would be difficult to maintain for long time post the entrance of big players. Competition is rising in almost all the categories while Nestle is expanding capacities which would force the company to maintain volume market share. Therefore, we expect pressure on pricing power of key brands. Nestle trades at a ~39% premium to the FMCG sector and we argue that this premium would narrow. We peg 30x P/E multiple on 12-months forward earnings and revise our target price to Rs 3,578 (Rs 3,400 earlier). We maintain 'SELL' rating on the stock," says PINC Research report.

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To read the full report click on the attachment