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.
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.
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).