1. Please refer to important disclosures at the end of this report 1
(` cr) 3QCY10 3QCY09 % yoy Angel Est % Diff
Revenue 1,637.3 1,302.2 25.7 1,549.7 5.7
EBITDA 321.9 264.2 21.8 308.4 4.4
OPM (%) 19.7 20.3 (63bp) 19.9 (24)bp
PAT 218.6 182.8 19.6 212.1 3.0
Source: Company, Angel Research
Nestle reported strong set of numbers for 3QCY2010 beating our expectations by
~3-5% on both the top-line and earnings front. While top-line grew 25.7% yoy
(largely driven by domestic volumes), earnings grew ~20% yoy despite margin
contraction aided by robust top-line growth. Post the 3QCY2010 results we have
revised our earnings upwards by ~1-2%. However, owing to the sharp run up in
the past three months, we maintain our Neutral view on the stock.
Strong top-line boosts results, gross margins still under pressure: Nestle registered
a robust top-line growth of 25.7% yoy to `1,637cr driven by steady growth in net
domestic sales (up 27.8% yoy, supported by higher volumes and realisations).
There was a marginal decline of ~4% yoy in exports (diversion of capacity to
meet increase in domestic demand and rupee appreciation). Earnings registered
19.6% yoy growth to `218.6cr largely driven by top-line growth. At the operating
front, significant spike in input costs (particularly milk and sugar) adversely
impacted gross margins. Moreover, the 47bp yoy jump in other expenditure (due
to higher advertising and sales promotions) led to OPM contraction by 63bp yoy.
Outlook and Valuation: At the CMP, Nestle is trading at ~110% premium to the
Sensex and ~80% ahead of its 5-yr average historical premium. We believe that
current valuations factor in the near-term growth potential leaving no room for
any negative surprises, which could emerge from – 1) gross margin pressures due
to rising input costs, 2) competition in the high-growth noodles category from
HUL and GSKCHL, and 3) up-tick in ad-spend. We remain Neutral on the stock,
with a revised Fair Value of `3,501 (`3,395) and await better entry opportunities.
Key Financials
Y/E Dec (` cr) CY2009 CY2010E CY2011E CY2012E
Net Sales 5,129 6,175 7,267 8,420
% chg 18.6 20.4 17.7 15.9
Net Profit 655 813 998 1,206
% chg 22.6 24.2 22.7 20.8
EBITDA (%) 20.2 19.6 20.1 20.8
EPS (`) 67.9 84.4 103.5 125.0
P/E (x) 51.8 41.7 34.0 28.1
P/BV (x) 58.3 40.7 32.6 27.5
RoE (%) 124.2 115.1 106.6 106.1
RoCE (%) 164.3 147.5 136.1 135.8
EV/Sales (x) 6.6 5.5 4.6 4.0
EV/EBITDA (x) 32.6 27.8 22.9 19.1
Source: Company, Angel Research
Nestle
Performance Highlights
3QCY2010 Result Update | FMCG
October 29, 2010
NEUTRAL
CMP `3,517
Target Price -
Investment Period -
Stock Info
Sector FMCG
Market Cap (`cr) 33,911
Beta 0.2
52 Week High / Low 3,520/2,456
Avg. Daily Volume 19,215
Face Value (Rs) 10
BSE Sensex 20,032
Nifty 6,018
Reuters Code NEST.BO
Bloomberg Code NEST@IN
Shareholding Pattern (%)
Promoters 62.8
MF / Banks / Indian Fls 10.2
FII / NRIs / OCBs 11.0
Indian Public / Others 16.0
Abs. (%) 3m 1yr 3yr
Sensex 11.3 24.8 0.3
Nestle 18.8 38.8 157.6
Anand Shah
022 – 4040 3800 Ext: 334
anand.shah@angelbroking.com
Chitrangda Kapur
022 – 4040 3800 Ext: 323
chitrangdar.kapur@angelbroking.com
Sreekanth P.V.S
022 – 4040 3800 Ext: 331
sreekanth.s@angelbroking.com
2. Nestle|3QCY2010 Result Update
October 29, 2010 2
Exhibit 1: Quarterly Performance
Y/E Dec (` cr) 3QCY10 3QCY09 % yoy 9MCY10 9MCY09 % chg
Net Sales 1,637.3 1,302.2 25.7 4,583.8 3,777.6 21.3
Consumption of RM 803.4 622.3 29.1 2,260.0 1,796.2 25.8
(% of Sales) 49.1 47.8 49.3 47.5
Staff Costs 104.1 97.4 6.8 315.5 294.8 7.0
(% of Sales) 6.4 7.5 6.9 7.8
Other Expenses 407.9 318.3 28.2 1,088.4 850.4 28.0
(% of Sales) 24.9 24.4 23.7 22.5
Total Expenditure 1,315.4 1,038.0 26.7 3,663.9 2,941.3 24.6
Operating Profit 321.9 264.2 21.8 919.9 836.3 10.0
OPM (%) 19.7 20.3 20.1 22.1
Interest 0.1 0.2 1.0 0.9 6.6
Depreciation 30.6 28.6 6.9 92.0 80.6 14.1
Other Income 9.5 8.8 8.0 28.8 27.3 5.2
PBT (excl. Extr. Items) 300.8 244.3 23.1 855.7 782.1 9.4
Extr. Income/(Expense) 1.8 4.4 0.1 14.7
PBT (incl. Extr. Items) 302.6 248.7 21.7 855.8 796.8 7.4
(% of Sales) 18.5 19.1 18.7 21.1
Provision for Taxation 84.0 65.9 27.5 240.4 217.7 10.4
(% of PBT) 27.9 27.0 28.1 27.8
Recurring PAT 216.8 178.4 21.5 615.4 564.4 9.0
PATM 13.2 13.7 13.4 14.9
Reported PAT 218.6 182.8 19.6 615.5 579.1 6.3
Equity shares (cr) 9.6 9.6 9.6 9.6
EPS (`) 22.7 19.0 63.8 60.1
Source: Company, Angel Research
Top-line growth robust driven by volumes, exports decline
Nestle registered robust top-line growth of 25.7% yoy to `1,637.3cr (`1,302cr),
ahead of our estimates, driven by steady growth in its net domestic sales (up 27.8%
yoy to `1,555cr supported by steady volume growth across categories). However, a
~4% yoy decline in exports to `82cr (diverted capacity due to the uptick in domestic
demand and rupee appreciation) restricted the top-line growth.
Management continued to focus on innovations during the quarter – 1) launched
Multigrainz noodles nationally, 2) launched new variants in Romantic Capsica to the
Me&Meri Maggi range, and 3) launched the Nestle EXTRAFINO milk and dark
chocolates in the premium range and the Nestle Milk ‘Half Fat’ and Nestle KITKAT at
`10.
3. Nestle|3QCY2010 Result Update
October 29, 2010 3
Exhibit 2: Robust top-line growth driven by volumes
Source: Company, Angel Research
Cost pressure increases, earnings growth largely driven by top-line
Nestle’s earnings (on a reported basis) registered 19.6% yoy growth to `218.6cr
(`182.8cr) despite the contraction in margin largely driven by the robust top-line
growth. At the operating front, contraction in gross margins by 128bp yoy (inflation
in milk and sugar prices) coupled with higher advertising and sales promotion spend
(reflected in 47bp yoy jump in other expenses) impacted OPM, which contracted by
63bp yoy. However, reduction in staff costs by 113bp yoy helped arrest further
decline in margin. Hence, EBITDA registered healthy growth of 21.8% yoy to
`321.9cr (`264.2cr).
Exhibit 3: Earnings led by healthy top-line growth
Source: Company, Angel Research
Exhibit 4: Gross margins contract yoy, flat qoq
Source: Company, Angel Research
-
5.0
10.0
15.0
20.0
25.0
30.0
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
(yoy%)
(`cr)
Top-line (LHS) YoY growth (RHS)
(10.0)
-
10.0
20.0
30.0
40.0
50.0
10
60
110
160
210
260
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
(yoy%)
(`cr)
PAT (LHS) YoY growth (RHS)
18.7 19.5
24.5
21.6 20.3
14.7
20.5 20.0 19.7
49.8 52.8 52.8 52.4 52.2 51.8 50.2 51.0 50.9
-
10.0
20.0
30.0
40.0
50.0
60.0
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
(%)
OPM Gross Margin
4. Nestle|3QCY2010 Result Update
October 29, 2010 4
Investment Rationale
Best play on emerging growth opportunity in foods: Nestle enjoys strong position
across categories in the food & beverage space through a diversified portfolio
of established brands like Maggi, Nescafe, Everyday, Kit Kat, Milkmaid, etc. We
are particularly bullish on under-penetrated categories like instant noodles,
value-added dairy products, chocolate and confectionery, which are witnessing
an uptrend in consumer demand.
Better distribution reach, focus on LUPs and new product launches to aid growth:
There is significant focus on improving distribution reach and various LUPs (low
unit packs, ~30% of sales) have been launched across product segments aiding
strong double-digit growth in the smaller towns. Moreover, new product
launches in existing categories, entry into new categories (like breakfast cereals)
and launches from the parent’s portfolio are likely to help Nestle maintain its
growth momentum.
Valuations at 110% premium to Sensex and factors in full potential: At the CMP,
Nestle is trading at ~110% premium to Sensex, which is ahead by a significant
~80% of its 5-yr average historical premium. While Nestle has been able to
maintain these premium valuations on account of strong parentage, dominant
brands, high RoEs and OPMs, we believe current valuations factor in the
near-term growth potential leaving no room for any negative surprises, which
could emerge from – 1) gross margin pressures due to rising input costs, 2)
competition in the high-growth noodles category from HUL (Knorr soupy
noodles) and GSKCHL (Horlicks Foodles), and 3) up-tick in ad-spend to battle
higher competitive intensity.
Outlook and Valuation
Post the 3QCY2010 result we have revised our earnings estimates for Nestle
marginally upwards by ~1-2% to factor in strong revenue traction.
Exhibit 5: Change in Estimates
Old Estimate New Estimate % chg
(` cr) CY11 CY12 CY11 CY12 CY11 CY12
Revenue 6,077 7,116 6,175 7,267 1.6 2.1
OPM (%) 19.7 20.1 19.6 20.1 (9) 7
EPS (`) 83.3 101.3 84.4 103.5 1.3 2.2
Source: Company, Angel Research
At the CMP of `3,517, the stock is trading at rich valuations of 28x CY2012E EPS of
`125. We maintain our Neutral view on the stock, with a revised Fair Value of
`3,501 (`3,395) and await better entry opportunities in the stock.
10. Nestle|3QCY2010 Result Update
October 29, 2010 10
Research Team Tel: 022 - 4040 3800 E-mail: Research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Nestle
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
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Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
