Nestle India Ltd. - Muted profitability and Expensive valuations - KR Choksey

- Net sales were up 13.3% YoY to Rs 2056 crores on the back of price increases.

- Export growth was moderate, up 3.3% YoY to Rs 101 crores.

- Gross margins improved by 308 bps YoY on account of higher realizations and product portfolio/channel mix, partially offset by higher input cost.

- EBITDA grew by higher rate of 19.5% YoY to Rs 466 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 7.8% YoY on account of higher depreciation & effective tax rate.

Strong domestic performance drives opline

Nestle maintained double digit growth, with Net sales up 13% YoY to Rs 2056 crores, driven by 14% YoY growth in the domestic markets, partially offset by subdued export growth of 3%. The growth was led by higher realizations while it has been adversely impacted by product portfolio and channel optimisation. Exports to third parties has grown by 19% while exports to affiliates declined by 10%.

Low RM cost & Other expenses lead to margin expansion

Nestle's gross margin expanded 308 bps YoY on account of lower raw material cost (commensurate price hikes implemented by Nestle).This coupled with 178 bps YoY decline in other expenditure as a % to sales resulted in Operating margins expanding by 117 bps YoY. Consequently Operating profit grew at a higher rate of 19.5% YoY to Rs 466 crores. We expect margins to improve in H2CY12 with moderation in commodity prices.

Adj Net profit was up 8% YoY to Rs 276 crores impacted by higher depreciation, increase in interest expense, lower other income & higher effective tax rate (end of first 5 years of tax holiday @ 100% of pantnagar profits).

Valuations & Views – We maintain our positive outlook on Nestle considering its strong double digit growth however valuations seems stretched 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 20% over CY11-12E. However with recent run in the stock price, the stock is trading at 41x CY12E EPS of Rs 120 & 34x CY13E EPS of Rs 144.Considering expensive valuations, we recommend SELL on the stock with a target price of Rs 4420 (35x one year forward EPS).

Source : Equity Bulls

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