Nestle India - Margin expansion drives profitability - Centrum

Rating: Neutral
Target Price: Rs4,567
CMP: Rs4,848
Downside: 6%

Nestle's results for Q1CY13 were in-line with our expectations. The company reported 9.8%YoY growth in revenues on the back of 7.7% YoY growth in domestic sales and 51% in exports. Operating profit growth was ahead of expectations at 16.5% on account of 65bps gross margin expansion and 136bps operating margin expansion due to mere 6.3%YoY growth in admin & other expenditure. Adj. PAT grew by 7.9% YoY. On the back of high valuations we maintain our Neutral view on the stock.

- Results in-line with expectations: Nestle posted topline in-line with our expectations at Rs22481mn (up 9.8% YoY) on the back of 7.7% YoY growth in domestic sales and exports growing at 51%. Operating profit was up by 16.5%YoY on the back of 65bps gross margin expansion and mere 6.3% YoY growth in admin & other expenses resulting in operating margins expanding by 136bps. Adj. PAT was at Rs3114mn, up 7.9% YoY (0.6% above expectations).

- Sales growth under pressure: Net domestic sales increased by 7.7% on the back of net realizations and favourable product mix. Constant price hikes, slower consumer spending coupled with rising competition impacted volumes. Exports grew by 51% for the quarter. However, we expect sales growth to pick up in H2CY13 on the back of favourable base coupled with increasing A&P spends.

- Operating margins continue to expand: Gross margins of the company were high at 54.8%, up 65bps YoY on the back of prudent price hikes and product portfolio/channel mix, partially offset by higher input cost. We expect gross margin levels to remain firm. Employee cost grew by 10.5%YoY (down 2.2% QoQ) due to an increase in headcount to support capacities for business expansion along with salary hikes. Admin & other expenditure were up by mere 6.3% YoY which helped operating margin expand by 136bps to 23.7%. Tax rate was higher during the quarter on the back of revaluation of the deferred tax liability consequent to the increase in income tax surcharge from 5% to 10%.

- Other Highlights: The total amount outstanding from the parent remains at $192mn with no fresh drawdown during the quarter.

- Estimates lowered; Maintain Neutral: We have marginally lowered our CY13/CY14 revenues by 2.4% and 2.8% on the back of lower sales growth while operating profit has been lowered by 4.6% and 3.4% respectively on the back of higher A&P spends and other expenditure. PAT is lowered by 4.8% and 2.6% on the back of higher tax rate. The stock currently trades at 38.6x CY13E EPS of Rs125.6 and 31.9x CY14E EPS of Rs152.3. We maintain Neutral rating for the scrip with a revised target price of Rs4,567 (based on 30x CY14E) with a downside of 6%.

Source : Equity Bulls

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