Nestle India - Yet to see the sun - Antique

Trend reversal will take some time due to rapid price hikes

Nestle has completed the first phase of its medium to long term growth plan through an aggressive capacity addition during the past three years. The company has almost doubled its capacity except in the case of beverages. The next phase of the strategy we believe would depend on the ramping up of distribution. The company has been increasing its distribution on a consistent basis to support its expansion plans. It has increased its distribution reach from about 2.5m outlets in CY2008 to 3.7m outlets in CY2011 (adding about 380,000 outlets in CY10 and 490,000 outlets in CY11). We understand that the company has taken up aggressive marketing of its product categories to revive sales and utilize the added capacity. However recovery would be gradual due to the rapid price hikes done by the company, which has been the primary factor behind the slowdown in sales.

Chocolates and confectionaries yet to recover

Nestle's chocolates and confectionaries business witnessed a volume drop of 15% during 1HCY12. This according to our channel checks was primarily due to the change in price points to INR6 and INR12 from INR5 and INR10, which in turn led to a substantial loss in volumes to duplicates. Nestle has now increased prices and changed the price points to INR5 and INR10 respectively leading to arresting of the fall in volumes. However regaining of the lost volumes, would take some time.

Largest beneficiary of the rural opportunity

Nestle India would be one of the largest beneficiaries of the rural opportunity led by the growing awareness for nutrition. The company has successfully gained on the growing consumption opportunity in India and increased penetration through small unit packs in instant noodles and chocolates and confectionaries.

Maggi maintains its domination despite new competition

Over the years, Nestle has successfully customised its flagship brand in instant noodles, Maggi to Indian taste buds. Newer players like GSK consumer and Hindustan Unilever after tasting some initial success in an expanding market have not been able to secure any major inroads in to the category challenging . However ITC has been able to show some potential in terms of competition. Strong candidate for re-rating, but inflection point could be still 3 quarters ahead At the CMP of INR4,766, the stock is trading at a one-year forward PE of 39.1x CY12e and 31.8x FY13e. We are extremely positive over Nestle India's long term growth potential backed by the rising awareness for nourishment and the lower penetration of the processed foods industry. However in the short term, performance revival would take about 3-4 quarters. We therefore recommend a HOLD on the stock at the current levels.

Source : Equity Bulls

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