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Reduce Nestle - Local demand nurtures topline growth - Elara Capital
Posted On : 2010-11-04 22:31:50( TIMEZONE : IST )
- Nestle
- Rating : Reduce
- Target Price : INR3,500
- Downside : 1%
- CMP : INR3,550 (as on 1 November 2010)
Topline takes off on home demand
Higher domestic demand pushed up the topline of Nestle during Q3CY10. Domestic sales grew 27.8% YoY to INR15.5bn on the back of volume and realization growth. We expect the company to maintain a healthy volume growth momentum going forward on larger demand for milk products and nutrition and prepared dishes.
Competitive force in instant noodles to hike brand investments
Although Maggi noodles continue to deliver a strong growth, the competition has been intensifying in instant noodles in the last six months with the launch of Knorr Soupy noodles and Foodles, by HUL and GSK Consumer respectively. Therefore we believe that the high competition in this segment would enhance the investment in brands through high advertisement and promotional expenses.
EBITDA margin under pressure on higher raw material prices
The EBITDA margin during Q3CY10 was under pressure due to higher raw material prices. Margins contracted by 73bps YoY to 19.9% in the quarter. During the 9MCY10, coffee and sugar prices surged by 23.5% and 42.4% respectively over the comparable period in CY09. We believe that EBITDA margin of the company would be under pressure for the medium term.
Valuation and recommendation
The company is expected to maintain a healthy volume growth going forward. Although we are comfortable with Nestle's robust business model and its high growth prospects, we are not so at ease about the premium valuation the stock is currently trading at. At the current price, the stock is trading at 43.7x CY10E earnings of INR 81.3 and 37.5x CY11E EPS of INR 94.7. We are changing our 'Accumulate' rating on the stock to 'Reduce' due to the price appreciation but maintain our target price at INR 3500, arrived at by the SOTP of valuation on the basis of PE, EV/EBIDTA, MCap to Sales and DCF.
