Nestle India Ltd (Q2 CY13)

India Infoline News Service | Mumbai |

Nestle matched our expectations by recording 11.4% yoy growth in net sales at Rs22bn during Q2 CY13.

CMP Rs5,226, Target Rs5,475, Upside 4.8%

  • Nestle matched our expectations by recording 11.4% yoy growth in net sales at Rs22bn during Q2 CY13. Domestic sales recorded healthy 9.2% yoy growth at Rs20.4bn driven by a mix of net realisations and volume growth in certain product categories. Exports (contributing ~7% to total revenues) increased sharply by 46.9% yoy to Rs1.7bn as third party exports to affiliates almost doubled.


  • Operating margins expanded by 40bps to 22% - in line with expectations, partly aided by lower raw material and overhead cost. Higher staff cost (up 14% yoy at Rs1.9bn) restricted further margin expansion. 

Cost Analysis
As a % of net sales
Q2 CY13
Q2 CY12
bps yoy
Q1 CY13
bps qoq
Material cost
45.2
45.4
(22)
45.2
2
Personnel cost
8.6
8.4
19
7.6
97
Other overheads
24.2
24.6
(40)
23.5
65
Total costs
78.0
78.4
(43)
76.3
164
Source: Company, India Infoline Research
  • Interest cost declined sharply by from Rs220mn in Q2 CY12 to Rs85mn in Q2 CY13 as exchange differences on long term foreign currency borrowings for fixed assets were capitalised, which were earlier added to finance costs.


  • Net profit for the quarter increased by 10.3% yoy to Rs2.7bn marginally above 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 and amortisation of capitalised borrowing costs) and tax outgo. We believe the higher depreciation is now in the base and growth will normalize in the coming quarters. Effective tax rate for the quarter was higher at 32.1% against 31.3% during Q2 CY12 due to the change in income tax surcharge from 5% to 10% effective April 01, 2013. 


  • During H1 CY13, Nestle reported 10.6% yoy growth in revenues at Rs44.6bn. - Impacted by portfolio optimization and slower consumer spends, volume growth for the period was mere 1.6% yoy. Beverages and Prepared Dishes segment reported 6.5% yoy volume growth while milk/chocolates segment’ volumes declined by 4.9%/3.3% yoy respectively. Higher depreciation (42% yoy increase at Rs1.7bn) during the period restricted net profit growth at 5.5% yoy to Rs5.5bn. 


  • We have changed our estimates marginally for FY13 and FY14 to factor in lower domestic revenue growth.

Changes in estimates
(Rs mn)
CY13E
CY14E
New
Old
Change (%)
New
Old
Change (%)
Net sales
93,154
94,869
(1.8)
1,06,568
1,09,124
(2.3)
EBITDA
21,006
21,393
(1.8)
24,431
25,017
(2.3)
OPM (%)
22.6
22.6
(0.1)
22.9
22.9
0.0
PAT
12,016
12,412
(3.2)
14,078
14,571
(3.4)
EPS
124.6
128.7
(3.2)
146.0
151.1
(3.4)
Source: Company, India Infoline Research
  • We believe Nestle is one of the best plays on the healthy growth potential in the Indian food-processing sector. With a favourable base effect on revenues in H2 CY13, we expect Nestle to witness healthy revenue growth. Higher adspends will further drive revenue growth. Nestle has spent ~Rs30bn on capex over the last three years for increasing capacities by 2X in all product lines except milk (Dairy Whitener) and coffee. We believe this should suffice the needs for next five years. Since most of Nestle’s capex is over, the company will start generating excess cash, which will result in higher dividend per share. We expect Nestle to witness 13.3%/14.8 CAGR in revenues/net profit respectively over CY12-14. The strong pricing power and robust brand portfolio will help Nestle expand operating margins. At the current market price of Rs5,226, the stock is trading at 35.8x CY14E EPS of Rs146. We maintain Market Performer rating on the stock with a 9-month price target of Rs5,475.

Results table
BSE 7,860.00 [19.35] ([0.25]%)
NSE 7,843.00 [33.85] ([0.43]%)

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(Rs m)
Q2 CY13
Q2 CY12
% yoy
Q1 CY13
% qoq
Net domestic sales
20,395
18,683
9.2
20,953
(2.7)
Exports
1,737
1,182
46.9
1,528
13.7
Net sales
22,132