Nestle India Ltd (Q4 CY13)

Nestle registered muted 4.6% yoy growth in revenues at Rs22.5bn during Q4 CY13 - below our expectations of Rs23.9bn. Domestic sales recorded mere 3.7% yoy growth at Rs21.2bn due to intense competition in noodles and beverages category and SKU rationalization. Weakness in urban and discretionary demand further impacted revenue growth. Underlying volume growth remains lackluster (could be negative). Exports (contributing ~7% to total revenues) increased by 20.9% yoy to Rs1.3bn aided by healthy increase in exports to affiliates and positive impact of rupee depreciation.

Operating margins for the quarter contracted by ~220bps to 21.2% due to 180bps increase in raw material cost on account of sharp rise in milk and milk powder prices. Higher staff and overhead cost further impacted operating margins.

Other income for the quarter more than doubled to Rs319mn from Rs126mn in Q4 CY12 due to higher average liquidities coupled with higher yields. Net profit degrew by 2.7% yoy at Rs2.7bn below our expectations of Rs3.1bn due to higher operating costs and higher tax outgo. Effective tax rate for the quarter was higher at 32.5% against 30.7% during Q4 CY12 mainly due to the change in income tax surcharge from 5% to 10% effective from April 01, 2013. Adjusted net profit after extraordinary income of Rs102mn registered mere 1% yoy increase at Rs2.8bn.

We have reduced our revenue and PAT estimates for FY14/15 to factor in slower revenue growth, input cost inflation and increased competitive pressure.

We believe Nestle is one of the best plays on the healthy growth potential in the Indian food-processing sector. However, a general economic slowdown, input cost inflation, SKU rationalization and intense competition in the market are likely to weigh on Nestle's performance. Weakness in urban and discretionary demand is expected to impact revenue growth for the next few quarters. We expect Nestle to witness 11.8%/11.6% CAGR in revenues/net profit respectively over CY12-15. At the current market price of Rs5,070, the stock is trading at 32.9x CY15E EPS of Rs154.1. We maintain Market Performer rating on the stock with a revised 9-month price target of Rs5,393 (earlier Rs5,767).