CMP Rs4,485, Target Rs4,923, Upside 9.8%
Source: Company, India Infoline Research
Source: India Infoline Research
- Nestle recorded 12.7% yoy growth in net sales at Rs19.9bn during Q2 CY12 - below our expectations of Rs20.4bn. Impacted by product portfolio and channel optimization, domestic sales recorded modest 13.7% yoy growth. We believe the volume growth would have been in low single digit due to weak demand environment and sharp price hikes taken across the portfolio. Exports (contributing 5% to total revenues) declined by 1% yoy to Rs1.2bn due to 25% decline in exports to affiliates despite 13.1% benefit due to rupee depreciation. Third party exports increased by 56% yoy.
- Operating margins surprised us positively by witnessing 210bps expansion at 21.6% fuelled by a 400bps drop in raw material cost. The key reason being a sharp ~30% yoy decline in coffee bean prices. HDPE prices too remained soft during the quarter. Milk, milk powder and vegetable oil prices however remained on an uptrend (wheat marginal increase). Nestle has implemented steep price hikes in the prepared food and dishes segment to mitigate the input cost impact. A 60bps/140bps increase in staff (led by increase in headcount to support capacities for business expansion)/overhead cost restricted further margin expansion.
|As a % of net sales||Q2 CY12||Q2 CY11||bps yoy||Q1 CY12||bps qoq|
- Net profit (post provision for contingencies of Rs75mn) recorded 15% yoy increase at Rs2.5bn – marginally below our expectations of Rs2.6bn. The growth could have been even better but for the higher depreciation (due to significant expansion in production capacities over past year), interest (includes Rs164mn exchange loss) and tax outgo (31.3% against 30.3% in Q2 CY11).
- After factoring in lower domestic and exports growth for H1 CY12, we have lowered our revenue/PAT estimates for CY12 and CY13 by 1.4%/2% and 1.3%/2.6% respectively.
|New||Old||Change (%)||New||Old||Change (%)|
- During the quarter, Nestle has drawn US$35mn of ECB (from Nestle SA for 5 years) under the approval from RBI to fund its capex plan of ~Rs20bn (for capacity expansions). The total amount outstanding as at 30th June 2012 is US$192mn (~Rs10.8bn). With the rupee depreciating by 8.4% during the loan period upto June 2012, cumulative cost of this borrowing has increased by 29.9% yoy on an annualized basis.
- 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 17.6% CAGR in revenues and 19.6% CAGR in 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 Rs4,485, the stock is trading at 31.4x CY13E EPS of Rs142.7. We maintain Market Performer rating on the stock with a revised 9-month price target of 4,923 (earlier Rs5,016).
|(Rs m)||Q2 CY12||Q2 CY11||% yoy||Q1 CY12||% qoq|
|Net domestic sales||18,683||16,435||13.7||19,461||(4.0)|
|OPM (%)||21.6||19.5||208 bps||22.3||(71) bps|
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