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Nestle India Ltd (Q3 CY12)

India Infoline Research Team / 12:06 , Nov 19, 2012

CMP Rs4,709, Target Rs5,096, Upside 8.2%

  • Nestle recorded 7.8% yoy growth in net sales at Rs21.2bn during Q3 CY12 – marginally below our expectations of Rs21.8bn. Impacted by product portfolio and channel optimization, domestic sales recorded mere 7.6% yoy growth. We believe the volume growth would have been flat due to weak demand environment, steep price hikes and rationalization of the portfolio. Exports (contributing ~5% to total revenues) increased by 10.5% yoy as exports to affiliates declined by 4.7%. Third party exports increased by 29.7% yoy (rupee depreciation benefit of 11.6%).

  • Operating margins remained stable at 21% aided by a 230bps drop in raw material cost aided by lower coffee bean and HDPE prices. Milk, milk powder, wheat and vegetable oil prices however remained firm. Nestle has implemented steep price hikes over the past 2-3 quarters in the prepared food and dishes segment to mitigate the input cost impact. A 60bps/150bps increase in staff (led by increase in headcount to support capacities for business expansion)/overhead cost restricted further margin expansion.

Cost Analysis
As a % of net sales Q3 CY12 Q3 CY11 bps yoy Q2 CY12 bps qoq
Material cost 45.9 48.2 (225) 45.4 48
Personnel cost 7.9 7.3 65 8.4 (48)
Other overheads 25.2 23.7 155 24.6 66
Total costs 79.0 79.1 (6) 78.4 66
Source: Company, India Infoline Research

  • Nestle booked an interest income of Rs76mn (interest expense of Rs12mn in Q3 CY11) due to a write-back of Rs179mn owing to capitalization of exchange losses that were expensed in interest costs in earlier quarters. Net profit (post provision for contingencies of Rs74mn) recorded mere 2.3% yoy increase at Rs2.7bn – marginally below our expectations of Rs2.9bn. The growth could have been even better but for the higher depreciation (due to significant expansion in production capacities over past year) and tax outgo (30.3% against 29.7% in Q3 CY11).
  • The total amount outstanding of ECB (from Nestle SA for 5 years) under the approval from RBI to fund its capex plan of ~Rs20bn (for capacity expansions) as at September 30, 2012 is US$192mn (~Rs10.1bn) (No additional debt during the quarter). With the rupee depreciating by 9.4% during the loan period upto September 2012, cumulative cost of this borrowing has increased by 15.6% yoy (Rs1.4bn) on an annualized basis.

  • After factoring in lower domestic and exports growth for H2 CY12, we have lowered our revenue/PAT estimates for CY12 and CY13 by 3.8%/7.5% and 4%/7.2% respectively.

Changes in estimates
(Rs mn) CY12E CY13E
  New Old Change (%) New Old Change (%)
Net sales 83,996 87,287 (3.8) 99,447 103,601 (4.0)
EBITDA 17,849 18,898 (5.5) 21,530 22,689 (5.1)
OPM (%) 21.3 21.7 (0.4) 21.7 21.9 (0.2)
PAT 10,515 11,365 (7.5) 12,762 13,757 (7.2)
EPS 109.1 117.9 (7.5) 132.4 142.7 (7.2)
Source: India Infoline Research

  • We believe Nestle is one of the best plays on the healthy growth potential in the Indian food-processing sector. To meet the rising consumer demand, Nestle is expanding capacity across product lines (would almost double capacity in categories like noodles, confectionaries and chocolates). The capacity expansion plan is on track and the company has already invested ~Rs20bn (~Rs4bn in CY10 and ~Rs16bn in CY11) over the past two years. Due to this high capex, the dividend payout ratio is likely to remain below normal over the next two years. We expect Nestle to witness 15.2% CAGR in revenues and net profit over CY11-13. The strong pricing power and robust brand portfolio will help Nestle expand operating margins. At the current market price of Rs4,709, the stock is trading at 35.6x CY13E EPS of Rs132.4. We maintain Market Performer rating on the stock with a revised 9-month price target of 5,096 (earlier Rs4,923).

Results table
(Rs m) Q3 CY12 Q3 CY11 % yoy Q2 CY12 % qoq
Net domestic sales 20,207 18,772 7.6 18,683 8.2
Exports 949 860 10.5 1,182 (19.7)
Net sales 21,156 19,631 7.8 19,866 6.5
Material cost (9,712) (9,454) 2.7 (9,024) 7.6
Personnel cost (1,671) (1,424) 17.4 (1,666) 0.3
Other overheads (5,339) (4,650) 14.8 (4,882) 9.4
Operating profit 4,434 4,103 8.1 4,295 3.2
OPM (%) 21.0 20.9 6 bps 21.6 (66) bps
Depreciation (739) (394) 87.9 (718) 3.0
Interest 76 (12) - (220) -
Other income 173 121 43.1 113 53.2
PBT 3,944 3,819 3.3 3,470 13.7
Tax (1,197) (1,134) 5.6 (1,085) 10.3
Effective tax rate (%) 30.3 29.7 - 31.3 -
Provision for contingencies (74) (74) 0.4 75 -
Reported PAT 2,673 2,612 2.3 2,460 8.7
PAT margin (%) 12.6 13.3 (67) bps 12.4 25 bps
Ann. EPS (Rs) 110.9 108.4 2.3 102.0 8.7
Source: Company, India Infoline Research

Financial Summary
Y/e 31 Dec (Rs m) CY10 CY11 CY12E CY13E
Revenues 62,547 74,908 83,996 99,447
yoy growth (%) 21.9 19.8 12.1 18.4
Operating profit 12,497 15,528 17,849 21,530
OPM (%) 20.0 20.7 21.3 21.7
Pre-exceptional PAT 8,187 9,615 10,515 12,762
Reported PAT 8,187 9,615 10,515 12,762
yoy growth (%) 25.0 17.5 9.4 21.4
         
EPS (Rs) 84.9 99.7 109.1 132.4
P/E (x) 55.5 47.2 43.2 35.6
Price/Book (x) 53.1 35.6 25.5 18.1
EV/EBITDA (x) 36.1 29.7 26.1 21.4
Debt/Equity (x) 0.0 0.8 0.9 0.4
RoE (%) 114.0 90.3 68.8 59.5
RoCE (%) 155.1 90.6 55.7 54.3
Source: Company, India Infoline Research