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Research
Nestle India - Near-term recovery unlikely - maintain SELL - Religare
Posted On : 2014-03-29 02:32:42( TIMEZONE : IST )
NEST has underperformed the BSE FMCG index by 20% over the past three months as slowing demand and increased competition raised concerns over growth. Our channel checks indicate continued pressure on demand, especially in the chocolate and coffee categories, even as competition is eating into noodle segment market share. Valuations too are rich and do not price in the earnings slowdown. We cut CY14/CY15 earnings by 3%/6% and our Dec'14 TP to Rs 4,400 from Rs 4,700. Maintain SELL.
- Channel checks point to continued demand slump: Demand and competitive pressures continue to assail NEST, as underscored by negative commentary from channel partners. Volume growth has declined sharply and is now in negative territory. In a further blow, latest offering Nestle Alpino has failed to take off, with most distributors we spoke to no longer stocking the product due to poor demand. Last quarter, NEST's revenues grew just 4.6% YoY (domestic business up a meagre 3.7%), down from ~10.7% in 9MCY13. Domestic volumes likely declined by 2-3% YoY in Q4CY13 after flat growth in Q3, and we do not expect any near-term demand revival.
- Weak earnings outlook: NEST's earnings growth has slowed markedly over the past two years to 8% (over CY11-CY13) from a 25% CAGR seen over CY06-CY11. This can be attributed to a prolonged demand slump as well as the impact of higher depreciation and interest on increased capex. We expect earnings growth to remain subdued over CY13-CY15, at 11.5% CAGR, as demand pressures are unlikely to ease.
- TP cut to Rs 4,400; maintain SELL: We cut our CY14E/CY15E earnings by ~3%/6% while revising our Dec'14 TP to Rs 4,400 (from Rs 4,700). Maintain SELL on rich valuations (36.2x/32.4x CY14E/CY15E earnings) and concerns over slowing urban demand. Key upside risks to our call would be (1) a revival in volume growth led by a pick-up in urban consumption, and (2) an open offer by the parent to increase its stake in NEST at a substantial premium.
