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Nestle India - Volumes remain sluggish, margins expand 400bps - Prabhudas Lilladher
Posted On : 2012-07-30 10:37:00( TIMEZONE : IST )
Sluggish volumes; lowest sales growth in 12 quarters: Revenues, EBITDA and PAT came in at Rs19.87bn (up 12.7% YoY), Rs4.3bn (up 24.7% YoY) and Rs2.43bn (up 10.6%) as against our expectations of Rs20.23bn, Rs3.98bn and Rs2.36bn, respectively. Domestic sales grew 13.7% and exports declined 1% due to 24.5% decline in exports to affiliates (positively impacted by 13% due to rupee depreciation). We estimate flattish volumes. Impact of aggressive pricing action in its Infant Foods portfolio is visible in 410bps gross margin expansion. Though Nestle has taken some corrective steps to address the slowdown in volumes viz. trade and consumer promos/price offs, focus on distribution expansion etc, we don't see immediate volume recovery. Capex plans are on track, per management.
* Pricing driven margin expansion: Gross margin expansion of 410bps is offset by higher employee costs (up 60bps) which went up due to significant increase in headcount on increased capacities and higher other expenses (up 140bps). Nestle has drawn US$35m from its parent under the ECB route. Total outstanding as on quarter end was US$192m for which Nestle incurred interest costs of Rs1.03bn (Rs82.7m as interest cost and rest currency related MTM). Rs843.3m was capitalized and rest was expensed through P&L.
* Maintain 'Accumulate': Notwithstanding its strong pricing power, weak volume growth on the back of aggressive price hikes and channel optimization (especially when its peers have reported healthy volume growth) will continue to drag the stock, in our view. It has underperformed BSE FMCG index by 23% in the past 12 months. Though corrective actions are underway, volume recovery will be gradual, in our view. We revise our revenue estimates downward by ~3-4% and increase our margin estimates and now model 110bps expansion for CY12e against flat operating margins earlier. EPS estimates are lower by ~1-1.2% now. Maintain 'Accumulate' as we don't see valuation comfort (30.5x CY13e).
