Nestle India - A near-balancing act!! - Prabhudas Lilladher

We are initiating coverage on Nestle India (NEST) with an "Accumulate" rating and target price of Rs5,244. NEST has been facing growth pangs since the last two years due to slowdown and competition in Nutrition (non-Infant), Dairy and Chocolates from players like DANONE, Mondelez and Mars. NEST has redefined its strategy to focus on premium products which will enable 22% PAT CAGR over CY13-15. We estimate CY14 and CY15 EPS at Rs153 and Rs188, respectively, which is 11% premium to the consensus average. We therefore initiate coverage with an "Accumulate" rating, given that valuations are still at a significant premium to LTA.

- NEST has seen growth pangs since the last two years; gradual pick-up in growth likely: NEST has seen a sharp decline in growth due to impact of slowdown, higher competition (Dairy, Chocolates, Coffee and Instant Noodles) and lack of big innovations. The company has taken corrective steps like 1) exit from low margin products and channels 2) 62% increase in distribution in four years 3) new launches to fill in portfolio gaps and 4) increasing brand association with consumers through use of digital medium. Based on the above, we expect a gradual pick-up in volume growth from H2CY13.

- Regaining lost ground in niche segments can entail high costs: NEST has renewed its focus on premium segment in categories like Nutrition (Nutren, Resource), Beverages (Nescafé Gold, Nescafé Cappuccino), Chocolates (Alpino, KitKat Dark, Nestle Dark) and Dairy (Milkmaid Creations). However, we believe that regaining ground lost to niche global brands (Ferrero Rocher, Snickers, Dairy Milk Silk, Bourneville, Ensure, Pediasure) will come at a significant cost even with the backing of brands and technology support of NESTLE SA.

- Sales pick-up and operating leverage to enable 22% PAT CAGR over CY13-15: NEST has seen 10% CAGR in input costs from past three years. However, input cost inflation has now abated to just around 2%. We estimate 22% PAT CAGR over CY13-15 based on 10.8% volume growth and 15.7% sales growth due to improved sweating of assets. However, valuations at 27.2xCY15 EPS of Rs188, limit scope for further re-rating in the absence of new growth engines.

Source : Equity Bulls

Keywords