Sell Nestle India; target of Rs 3975: KRChoksey

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Sell Nestle India; target of Rs 3975: KRChoksey

KRChoksey is bearish on Nestle India and has recommended sell rating on the stock with a target of Rs 3975 in its November 9, 2011 research report.

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KRChoksey is bearish on Nestle India and has recommended sell rating on the stock with a target of Rs 3975 in its November 9, 2011 research report.

"Nestle maintained double digit growth, with Net sales up 20% y-o-y to Rs 1963 crores, driven by 21% y-o-y growth in the domestic markets, partially offset by subdued export growth of 5%( on account of ban on export of milk powder). The growth was driven by volume across segments & steep price hikes taken by the company in the Infant & Baby food and Beverage segment."

"Net sales were up 20% y-o-y to Rs 1963 crores on the back of strong domestic volumes & price increases. Export growth was moderate on account of ban on export of milk powder. Gross margins improved by 90 bps y-o-y on account of price hikes taken by the company to mitigate rising milk & coffee prices. EBITDA grew by higher rate of 27% y-o-y to Rs 410 crores. Increase in effective tax rate is on account of Pantangar facility coming out of 100% tax exemption. Net profit grew at a lower rate of 20% y-o-y on account of higher depreciation & effective tax rate. Nestle's gross margin expanded 129 bps q-o-q & 91 bps y-o-y on account of lower raw material cost (commensurate price hikes implemented by Nestle).This coupled with 123 bps y-o-y decline in other expenditure as a % to sales resulted in Operating margins expanding by 124 bps y-o-y. Consequently Operating profit grew at a higher rate of 27% y-o-y to Rs 410 crores. We expect margins to improve in H2CY12 with moderation in commodity prices."

"We maintain our positive outlook on Nestle considering its strong double digit growth despite inflationary pressures leveraging on its strength in terms of product mix, presence in high growth categories, distribution channels & brand equity. Going forward we expect Nestle's topline & earnings to grow at a CAGR of 22-23% over CY10-12E. However with recent run in the stock price, the stock is trading at 42x CY11E EPS of Rs 105 & 35x CY12E EPS of Rs 128.Considering expensive valuations, we recommend SELL on the stock with a target price of Rs 3975(31x CY12E EPS of Rs 128)," says KRChoksey research report.

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