Nestle - Continued focus on margins - Centrum

Nestle posted Q2CY13 results in-line with expectations with net sales at Rs22132mn, up 11.4%YoY following the growth of 9.2% YoY in domestic sales and 47% YoY in exports. The company posted positive volume growth during the quarter while it was up 1.6% for H1CY13. Operating profit was up 13.6% YoY as operating margin expanded 43bps due to 22bps gross margin expansion and lower admin & other expenditure. Adj PAT was up 16.2% YoY to Rs2823mn. We maintain Sell rating on the stock on the back of near term challenges.

Results in-line with expectations: Nestle posted 11.4%YoY growth in net sales following 9.2% YoY growth in domestic sales while exports grew 47% YoY on the back of lower base and strong exports to affiliates. Operating profit was at Rs4880mn up 13.6%YoY as operating margin expanded by 43bps due to gross margin expansion of 22bps while admin & other expenditure grew by mere 9.6% YoY. Adj. PAT was at Rs2823mn, (up 16.2% YoY).

Volume growth continues to be under pressure: Continued uncertainty in demand on the back of challenging macro environment coupled with portfolio optimization and aggressive pricing impacted volume growth. The company posted positive volume growth during the quarter while for H1CY13 it was up 1.6% due to strong growth in prepared dishes (up 6.5%) and beverages (up 6.5%). Volume growth in the milk products & nutrition and chocolate segments was down 4.9% and 3.3% respectively for H1CY13. Going forward we expect the company to post volume growth of 4.2% in CY13 against 1% in CY12 with beverages and prepared dishes both growing by 9% each. However, we have modelled volume de-growth in milk & nutrition (3%) and chocolates (1%).

Continued focus on operating margins: Operating profit for the company grew by 13.6% YoY at Rs4880mn as operating margins expanded by 43bps to 22%. Gross margin expanded by 22bps as commodity basket price index was up by mere 2.2%. Product mix change and price hikes further helped gross margin expansion. Admin & other expenditure were up by mere 9.6% YoY as we believe the company invested less in A&P and saved in power & fuel cost. For H1CY13 A&P was 4.3% of sales against 4.6% in H1CY12 while power & fuel cost was 4.2% of sales (4.4% in H1CY12).

Other highlights: Depreciation for the quarter was high due to expansion in production capacities over the past year. The company continues to have USD192mn outstanding ECB from its parent company.

Estimates lowered: We have lowered our sales estimates for both CY13/CY14 by 3%/4.7% predominantly on the back of lower volume growth for milk & nutrition and chocolates segments. Operating margin has been increased by 49bps and 22bps for CY13/CY14 on the back of gross margin expansion and lower A&P spends. PAT has been lowered by 4% for CY14.

Maintain Sell: Nestle is currently trading at 42.6x and 36.5x CY13E and CY14E EPS of Rs125.1 and Rs146.1 respectively. We maintain Sell view on the stock and arrive at a revised target price of Rs4,821 (33x CY14) giving 10% premium to our target multiples for other MNC FMCG companies and 10% discount to 5-year mean multiple of the company. We believe near term challenges persist on the back of lower discretionary spends which would cap the upside for the stock.

Source : Equity Bulls

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