Nestle India - 4QCY12 Results Update - Motilal Oswal

Nestle India's 4QCY12 results are in line with our expectations. Net sales grew 10.1% to INR21.5b (v/s est INR21.7b), EBITDA margins expanded 190bp to 23% (est 22.3%), while recurring PAT grew 9.7% to INR2.94b (est INR2.88b).

- Domestic sales growth of 9.6% was entirely pricing and mix led, while export revenues grew 20.6% YoY led by third party exports, which were up 47.2% YoY. We estimate flat-to-marginal decline in domestic volumes (post a decline of ~5% in 3QCY12) on account of portfolio and channel rationalization.

- Gross margin expanded 90bp YoY to 55.2% driven by pricing and mix improvement. EBITDA grew 20%, while margin expanded 190bp to 23% (est 22.3%), despite 70bp increase in staff costs as NEST benefited from savings in other expenses (down 160bp YoY). Flat other expense despite higher ad spends and freight costs, indicating decline in other components of SG&A.

- Higher capital costs due to capex (depreciation up 87%, interest costs up 3x) resulted in 9.7% YoY PAT growth to INR2.94b (est INR2.88b). NEST's capex for CY12 stood at INR6bn and its gross block has increased 2.6x since CY10.

- CY12 – sales, EBITDA and PAT are up 10.8%, 17.6% and 6.8% respectively. Gross and EBITDA margins expanded 250bp and 130bp YoY respectively.

- CY12 volumes and profitability were impacted by channel and mix rationalization and the higher capital costs due to ongoing capex plans. We expect volume growth to show gradual recovery on account of incrementally favorable base comparison and aggressive trade and brand investments.

- However, current valuations, despite correcting 15% from the peak, at a P/E of 34.3x CY13E and 28.1x CY14E EPS, appear expensive given the context of sluggish volume performance. We maintain Neutral with a revised target price of INR4,900 (based on 30x CY14E EPS).

Source : Equity Bulls

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