Nestle India - Profit remains the focus - Antique

Nestle India Ltd.'s (Nestle) results were in line with our expectations with a 10% sales growth at INR21.9bn. EBITDA and PAT grew by 20% and 9% respectively to INR4.83bn and INR2.79bn. Domestic sales grew by 10% to INR20.4bn led by net realisations and product mix. Exports grew by 21% to INR1.1bn, contributed largely by exports to third parties, up by 47.2%. The lower growth in PAT during 4QCY12 was owing to a higher interest and depreciation component. Interest outgo grew to INR99m from about INR33m in the previous corresponding period. The increase in finance costs is majorly on account of high average outstanding loan during the year as well as completion of major capital projects resulting to finance costs being charged to the income statement. The major capacity addition by the company also led to an increase of 87% in depreciation to INR835m.

Results highlights

CY12 sales grew by 11%

CY12 sales grew by 11% to INR83.0bn while EBITDA and PAT grew by 17% and 6% respectively to INR18.2bn and INR10.0bn. The company recorded an EPS of INR111 during CY12 as against an EPS of INR105 during CY11. Exports sales grew by 7.6% where exports to third parties grew by 36.7% partially offset by a decline in exports to affiliates by 11.7%.

EBITDA margin improvement led by drop in input cost

During 4QCY12, EBITDA margin improved by 181bps to 22.4% with 93bps drop in raw material cost to 44.8% of net sales and 154bps drop in other expenditure to 24.7% of net sales. The cost of raw material as a percentage of net sales has decreased largely due to higher sales realisations, product, and channel mix. The effect however was partially offset due to increase in employee costs which increased by 66bps to 8.1% of the net sales as the company increased its head count to support business expansion and company's remuneration strategy.

Third interim dividend paid out for the year

The company declared third interim dividend for CY12 at INR12.5 per equity share (nominal value INR10 per share). With a payout of dividends in August and December of INR18 each, the aggregate dividend paid for the year stands at INR48.5 per equity share.

Valuation and outlook

At the CMP of INR4,594, the stock is trading at a PE of 37x CY13e and 28x CY14e. We are maintaining our EPS estimates for CY13e and CY14e at INR129.3 and INR171. We believe in Nestle India's medium to long-term growth potential in view of the underlying growth potential of the processed foods industry (particularly nourishment as a category). We expect the company to witness a revival in sales during 2HCY13 with the price hikes already in the base and aggressive brand investments. Therefore, at the current levels, we upgrade the stock to BUY with a target price of INR5,126.

Source : Equity Bulls

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