Nestle India (Q2 CY14)

Nestle beat our expectations of ~Rs23bn by recording 9.3% yoy growth in revenues at Rs24.2bn during Q2 CY14.

Aug 11, 2014 07:08 IST India Infoline News Service

CMP Rs5,407, Target Rs4,902, Downside 9.3% 

  • Nestle surpassed our expectations of ~Rs23bn by recording 9.3% yoy revenue growth at Rs24.2bn during Q2 CY14

  • Domestic sales grew by 9.7% yoy to Rs22.4bn led by price hikes in milk products and infant nutrition portfolio. Exports increased by 4.1% yoy to Rs1.8bn led by strong ~36% yoy growth in third-party exports

  • OPM contracted by 175bps to 21.4% due to 240bps increase in raw material cost on account of sharp rise in milk and milk powder prices

  • Net profit increased by 6.1% yoy at Rs2.9bn above our expectations of Rs2.7bn partly aided by higher other income and lower interest outgo

  • We expect Nestle to witness 11%/13% CAGR in revenues/net profit respectively over CY13-15.

  • Nestle is currently trading at premium valuations of 36.4x CY15E EPS of Rs148.6. Recommend Reduce with a 9-month price target of Rs4,902

Result table
(Rs m) Q2 CY14 Q2 CY13 % yoy Q1 CY14 % qoq
Domestic FMCG sales 22,381 20,395 9.7 21,673 3.3
Exports 1,809 1,737 4.1 1,462 23.7
Total sales 24,189 22,132 9.3 23,135 4.6
Other operating income 131 95 37.5 81 62.2
Total income 24,320 22,227 9.4 23,215 4.8
Material cost (11,509) (10,004) 15.0 (10,707) 7.5
Personnel cost (1,919) (1,759) 9.1 (1,840) 4.3
Other overheads (5,726) (5,350) 7.0 (5,732) (0.1)
Operating profit 5,166 5,114 1.0 4,937 4.7
OPM (%) 21.4 23.1 (175) bps 21.3 2 bps
Depreciation (842) (887) (5.1) (839) 0.3
Interest (38) (85) (55.7) (103) (63.3)
Other income 231 154 50.1 309 (25.3)
PBT 4,518 4,297 5.2 4,304 5.0
Tax (1,382) (1,334) 3.6 (1,374) 0.6
Effective tax rate (%) 30.6 31.1 - 31.9 -
Provision for contingencies (94) (109) (14.0) (339) (72.3)
Adjusted PAT 3,042 2,853 6.6 2,592 17.4
Adj. PAT margin (%) 12.6 12.9 (31) bps 11.2 138 bps
Extra ordinary items (164) (139) 17.6 - -
Reported PAT 2,879 2,714 6.1 2,592 11.1
Ann. EPS (Rs) 126.2 118.4 6.6 107.5 17.4
Source: Company, India Infoline Research

Revenue growth beats expectations

Nestle beat our expectations of ~Rs23bn by recording 9.3% yoy growth in revenues at Rs24.2bn during Q2 CY14. Domestic sales recorded healthy 9.7% yoy growth at Rs22.4bn led by price hikes in milk products and infant nutrition portfolio. Underlying volume growth for the quarter is expected to have improved to low single digit on a low base. Exports (contributing ~7% to total revenues) increased by 4.1% yoy to Rs1.8bn led by strong 35.8% yoy growth in third-party exports even as exports to affiliates (mainly Russia) declined by 7.1% yoy.

New launches during the quarter

Nestle has recently launched low fat Nestle Sweet Lassi, Nestle Butter milk with ayurvedic herbs and spices and Maggi Oats noodles (priced at 2.5x the base variant).

Sharp rise in input cost pull down operating margins by 175bps

Operating margins for the quarter contracted by ~175bps to 21.4% due to sharp 240bps increase in raw material cost on account of sharp rise in milk and milk powder prices. Lower overhead and staff cost cushioned margins.


Cost Analysis
As a % of net sales Q2 CY14 Q2 CY13 bps yoy Q1 CY14 bps qoq
Material cost 47.6 45.2 238 46.3 130
Personnel cost 7.9 7.9 (2) 8.0 (2)
Other overheads 23.7 24.2 (50) 24.8 (111)
Source: Company, India Infoline Research

Net profit above expectations aided by lower interest outgo and higher other income

Net profit increased by 6.6% yoy to Rs3bn above our expectations of Rs2.7bn partly aided by higher other income and lower interest outgo. Other income for the quarter increased by 50.1% yoy to Rs231mn from Rs154mn in Q2 CY13 due to higher average liquidities coupled with higher yields.

ECB fully paid back to parent

Nestle had raised a US$192mn ECB from Nestle SA five years back to fund its large capital expansion plans of Rs30bn  . With this expansion now complete, Nestle has completely repaid the loan (US$157mn in the June quarter and US$35mn in July). Due to which interest cost for the quarter reduced to Rs38mn against Rs85mn in Q2 CY13.

Trading at premium valuations, recommend Reduce

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. We expect Nestle to witness 11%/13% CAGR in revenues/net profit respectively over CY13-15. At the current market price of Rs5,407, the stock is trading at premium valuations of 36.4x CY15E EPS of Rs148.6. We recommend Reduce rating on the stock with a revised 9-month price target of Rs4,902.


Financial Summary
Y/e 31 Dec (Rs m) CY12 CY13 CY14E CY15E
Revenues 83,023 90,619 98,985 1,11,412
yoy growth (%) 10.8 9.1 9.2 12.6
Operating profit 18,580 20,196 21,207 24,481
OPM (%) 22.4 22.3 21.4 22.0
Pre-exceptional PAT 10,679 11,033 12,067 14,323
Reported PAT 10,679 11,171 12,067 14,323
yoy growth (%) 11.1 4.6 8.0 18.7
EPS (Rs) 110.8 114.4 125.2 148.6
P/E (x) 48.8 47.2 43.2 36.4
Price/Book (x) 29.0 22.0 17.4 14.1
EV/EBITDA (x) 28.5 26.0 24.5 21.0
Debt/Equity (x) 0.6 0.5 0.0 0.0
RoE (%) 69.5 53.0 45.0 42.9
RoCE (%) 60.5 52.0 53.2 60.8
Source: Company, India Infoline Research

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