Nestle India - 4QCY16 Result Update - Better Times Awaited; Maintain REDUCE - Reliance Securities

Benefiting from lower base effect, Nestle India has reported 16.2% YoY growth in revenue to Rs22.6bn in 4QCY16. Its domestic sales increased by 17% YoY, while exports sales registered 8% YoY growth. Despite 12.2% YoY rise in EBITDA to Rs3.8bn, net profit fell by 8.7% YoY to Rs1.7bn primarily due to provisions for contingencies of Rs810mn. Though we expect Nestle to report revenue and earnings CAGR of 12.8% and 12.2%, respectively through CY16-18E, valuations at 41.8x CY18E earnings appear stretched in our view. Hence, we maintain our REDUCE recommendation on the stock with a revised Target Price of Rs5647, which implies 9% downside from the current levels.

Demand Scenario Remains Tough

In our view, it is pertinent to compare Nestle's 4QCY16 performance with that of 4QCY14 instead of 4QCY15 to negate the impact of ban on Maggi. Compared to 4QCY14, Nestle's sales and EBITDA were lower by 10% and 28%, respectively in 4QCY16, which suggests that there is still a long way to go before a full-fledged recovery. However, we would like to add that 4QCY16 numbers must also have been adversely impacted due to demonetization. Post its re-launch towards end of 4QCY15, Maggi has regained market leadership in instant noodles segment. While the brand now commands >60% of relevant market share, it is still lower than the pre-ban share of ~85%.

Higher Commodity Prices Impact Margins

Gross margins contracted by 90bps YoY to 57.6% in 4QCY16 impacted by higher commodity prices. Employee cost increased by 40bps to 12.9% of sales, while marking an increase of 20% YoY on absolute basis. Notably, other expenses were lower by 70bps at 27.8% of sales. Resultant EBITDA margins marginally declined 60bps to 16.9%, leading to 12.2% growth in absolute EBITDA to Rs3.8bn.

Outlook & Valuation

As the overall CY16 growth numbers benefited from a lower base effect due to ban on Maggi, we believe that the performance in CY17 would be a true barometer of Nestle's operational efficiency. Even in CY16, Nestle's performance excluding Maggi has been disappointing. We expect Nestle to report revenues of Rs103.3bn and Rs116.6bn and adjusted net profit of Rs12.6bn and Rs14.3bn in CY17E and CY18E, respectively. Based on adjusted EPS of Rs148.6, the stock currently trades at rich valuations of 41.8x CY18E earnings.Hence, we maintain REDUCE recommendation on the stock with Target Price of Rs5647, based on 38x Dec'18 EPS.

Shares of NESTLE INDIA LTD. was last trading in BSE at Rs.6254.25 as compared to the previous close of Rs. 6194.4. The total number of shares traded during the day was 2468 in over 1143 trades.

The stock hit an intraday high of Rs. 6266.95 and intraday low of 6121.05. The net turnover during the day was Rs. 15345363.

Source : Equity Bulls

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