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Analysts wary of Nestle's growth plans on Q1, suggest sell

Credit Suisse has maintained underperform rating on the stock but increased target price to Rs 6450 per share.

May 19, 2015 / 10:18 AM IST
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Moneycontrol Bureau

Analysts do not seem to be too impressed with Nestle India’s January-March quarter (Q1 as it follows January-December financial year). The FMCG major reported a 23.58 percent increase in net profit at Rs 320.28 crore while net sales rose to Rs 2,506.79 crore, up 8.35 percent as against Rs 2,313.46 crore on yearly basis.

With a sell rating, CLSA says Nestle needs to optimise its revenue-margin equilibrium to drive a sustainable growth as it finds valuations expensive. The brokerage has lowered revenue growth but raised margin estimates.

"Nestle once again displayed its preference for margins over growth as domestic revenues grew just 7.6 percent (Y-o-Y) during 1QCY15, despite an undemanding base. Gross margins however rose to a multi-year high. The company enjoys huge pricing power but excessive margin focus may hurt volume growth. This is at the time when competition is rising in the packaged foods space, which could further aggravate growth concerns for the company," it adds.

Credit Suisse has maintained underperform rating on the stock but increased target price to Rs 6450 per share. It has increased earnings estimates for CY15-17 by 2 percent to build in the input cost savings being fully retained. However, it is disappointed, on the lack of focus on volume growth and market share, which are long-term value drivers for a consumer company.

However, Deutsche Bank reiterates buy with a target price of Rs 7500 per share. Its positive stance is based on "plans to pursue a path of ‚premiumising‛ its portfolio, a spate of launches of chocolates (the re-launched ‘Maggi’ noodles with oats), and repositioned ‘Everyday’ dairy whitener (moving the brand up in the value-chain), likely re-launch of the milk portfolio as irrational competition from Danone recedes, distribution project to improve salesman productivity and merchandising at point-of-purchase and a likely urban consumption recovery in CY2015."

At 12:31 hrs Nestle India was quoting at Rs 7,005.00, down Rs 7.80, or 0.11 percent on the BSE.

Posted by Nasrin Sultana