Add Nestle India: Way2Wealth

Way2Wealth is bullish on Nestle India and has recommended add rating on the stock in its April 27, 2012 research report.

“Nestle India, The softness witnessed in Q4 continued in Q1 as well. We saw Q4 volume growth tapering to higher single digits for prepared & food dishes & negative for milk as consumers got a taste of heavy price increases. The topline growth of 13.1% in Q1CY12 was on the back of higher realizations while volume growth remained subdued. Q1 is proof that the consumer is yet to swallow those price increases. Quarterly topline crossed `2000 crs this quarter. Tapering volumes growth will be seen in the next 2–3 quarters as consumer confidence straddles between higher cost of living & stagnant incomes as the economy slows down.”

“Domestic sales, which contribute 95% to the topline, grew by 13.7% YoY to `1946.14 crs. o Exports, which contribute the remaining 5 %, were higher by ~9.8%. at `101.3 crs this quarter. Export growth took a knock on account of ban on milk powder. Rupee depreciation contributed 6.3% to export growth this quarter. o Nestle primarily caters to the urban and semi-urban region. Strong demand came in from Tier II & Tier III cities. Nestle has been able to penetrate even further with its strategy of making available its popular brands in lower price points. We estimate a 14-15% growth in sales in CY12 following the launch of new fortified foods in 2010 and lower PPP launches.”
“EBITDA grew to `444.4 crs in Q1CY12 vis-à-vis `378.4 crs last year’s corresponding quarter. The company improved its margins marginally both YOY 80 bps & 250 bps QOQ on account of product mix tilt towards high margin products. EBIDTA margin in Q1was at 21.7%. o Net profit was at `275.7 crs as against `255.7 crs in Q1CY12. PAT margins fell to 13.5% on account of the tax rate moving up to 31.6% vs. 28.6% YOY. QOQ PAT margins increased by 170 bps. Pantnagar tax concession was reduced from 100% to 30% this budget.”

“Nestle has presence in low penetration, high growth markets where there is enough room for all players to grow as well as grow the market. Capex will enable growth in newer markets. Margin maintenance will be easier in a stable price scenario. This will leave scope for higher selling and distribution expenses. The company is in an investment mode and hence return ratios would be under pressure going into CY12 & 13. We believe the premium to peers (which would be growing faster on a smaller base) could take a knock and hence believe the stock could be available 4-5% lower from current levels. At the CMP of `4763 the stock is trading at 45.6x and CY12E estimated EPS of `104/- respectively. India’s food and beverage sector is expected to grow at double the rate of GDP for the next few years. We believe this stock lets investors play the India consumer story and that too in a segment where scope for growth is tremendous. We believe this stock will give good return in a span of 2-3 years and advise investors to “ADD” the stock through its weakness during CY12,” says Way2Wealth research report. 

FIIs holding more than 30% in Indian cos

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More