Nestle India share price fell more than 3 percent intraday Monday as brokerage houses remained bearish on the stock after weak operational performance in the quarter ended March 2017.
Motilal Oswal has downgraded the stock to sell with a revised target of Rs 5,715 (39x CY18 EPS, at a 20 percent discount to three-year average multiple) as valuations are rich at 48.9x CY18 EPS.
"It has been close to two years since the new CEO stepped in, and while the pace of new launches has markedly improved, there has been no material improvement on price actions to boost growth or advertising to support new products. Double-digit volume-led sales growth seems long time away. Nestle is no longer the business it was before CY11 (when it used to report consistent double-digit volume growth with over 100 percent return on capital employed) and may never be," it reasoned.
Kotak Institutional Equities also has a sell call on the stock with a target price of Rs 5,700.
It trades at nearly 40X CY2019 (i.e. 32-month forward) EPS with a higher downside risk to EPS estimates than upside – not a great combination to be bullish on, according to the research house.
Kotak has kept its revenue and PAT estimates for CY2017-19 broadly unchanged even as EBITDA estimates get a lift from change in employee cost accounting.
March quarter earnings barring revenue missed analysts' expectations despite low base. Profit grew by 6.8 percent year-on-year to Rs 306.7 crore while revenue increased 9.5 percent to Rs 2,591.9 crore for January-March quarter.
Domestic business registered growth of 9 percent led by volume growth across categories including Maggi noodles and better realisations while export sales disappointed with revenue growth of 1 percent for the quarter due to lower sales in Nepal and Bhutan.
Operating profit (EBITDA - earnings before interest, tax, depreciation and amortisation) slipped 4.2 percent to Rs 525 crore and margin contracted by 290 basis points to 21.1 percent compared with year-ago period.
According to Kotak, Nestle will likely have to sacrifice margins to get back to respectable levels of growth.
Profit was estimated at Rs 341 crore on revenue of Rs 2,548 crore while operating profit was expected at Rs 566 crore with margin at 22.2 percent for the quarter, according to analysts polled by CNBC-TV18.
The base quarter had witnessed an 8 percent decline in sales as Maggi was only gradually scaling up after its re-launch in November 2015. Q4CY16 had actually posted decent growth YoY, despite demonetisation.
With underweight rating on the stock, Morgan Stanley sees downside risks to valuation if volume growth across the portfolio (including Maggi) lags any recovery in urban consumption growth.
"We have long held a view that packaged foods in India may be nearing an inflection point, and Nestle appears best placed to capitalise on this growth potential, given its strong brand equity, wide global experience and strong local knowledge. However, continuing weak growth trends across other categories like infant nutrition, coffee, and chocolates keep us underweight," it reasoned.
Contrary to market expectations, it expects only a gradual recovery in revenue growth trends.
JP Morgan, too, has underweight rating on the stock as it feels valuations at 50x CY17 P/E are expensive given limited upside risk to earnings estimates and are pricing in the optimism related to a step-up in focus towards product innovation/renovation driving volume recovery.
At 12:33 hours IST, the stock was quoting at Rs 6,644.80, down Rs 174.75, or 2.56 percent on the BSE.
Posted by Sunil Shankar Matkar
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