1. 1QCY2010 Result Update I FMCG
April 22, 2010
Nestle NEUTRAL
CMP Rs 2,865
Performance Highlights Target Price -
Nestle registered a modest Top-line growth of 16.9% yoy to Rs1,480cr, Investment Period -
marginally below our estimate, supported by higher volumes and limited price
increases. Bottom-line (on a reported basis) registered a muted growth of Stock Info
2.3% yoy to Rs202cr, significantly below our expectation of a 18.6% growth, Sector FMCG
largely impacted due to significant spike up in input costs. Post 1QCY2010
results, we have revised our Earnings estimates for Nestle marginally Market Cap (Rs cr) 27,625
downwards by 3-5% to factor in higher-than-expected rise in input costs, jump
Beta 0.1
in Other Expenditure (due to higher fuel costs), higher brand investments and
lower Tax savings in the current year. Hence, we downgrade the stock to 52 WK High / Low 3,025/1,652
Neutral from Accumulate and await better entry opportunities in the stock.
Avg. Daily Volume 33,449
Steady Top-line; Earnings disappoint as input costs spike: Nestle registered a Face Value (Rs) 10
modest Top-line growth of 16.9% yoy to Rs1,480cr (Rs1,266cr) aided by BSE Sensex 17,574
steady growth in its Net Domestic Sales (up 16.7% yoy to Rs1,391cr). Export
Sales registered a positive growth of 20.4% yoy. Bottom-line (on a reported Nifty 5,269
basis) registered a muted growth of 2.3% yoy to Rs202cr (Rs197cr) largely Reuters Code NEST.BO
impacted due to significant spike up in input costs (Milk up 30% yoy, Sugar up
70% yoy and Wheat up 25% yoy, highest in last 10 years). Hence, Gross Bloomberg Code NEST@IN
Margins contracted by 263bp yoy. Moreover, high investments into brands
Shareholding Pattern (%)
and distribution capabilities coupled with limited/staggered price increases
and 150bp yoy jump in Other Expenditure (due to recovery in fuel prices) led Promoters 61.9
to a sharp Margin contraction of 397bp yoy at the EBITDA level.
MF/Banks/Indian FIs 11.2
Outlook and Valuation: At the CMP of Rs2,865, the stock is trading at rich FII/NRIs/OCBs 10.7
valuations of 29.1x CY2011E revised EPS of Rs98.5. Nestle justifies its 16.2
Indian Public
premium valuations compared to its peers on account of its global parent
support, strong brand recall, excellent Return Ratios and superior EBITDA Abs. (%) 3m 1yr 3yr
Margins. However, at current levels, we believe the stock leaves little room for
upside and negative surprises given significant spike up in input costs and Sensex 4.2 62.5 26.5
rising competitive pressures (particularly in Noodles category). Hence, we
downgrade the stock to Neutral from Accumulate with a revised Fair value of Nestle 13.8 67.6 187.7
Rs2,841 (Rs2,925) and await better entry opportunities in the stock.
Key Financials
Y/E Dec (Rs cr) CY2008 CY2009 CY2010E CY2011E
Net Sales 4,324 5,129 6,015 6,956
% chg 23.4 18.6 17.3 15.6
Net Profit 534 655 786 950
% chg 29.1 22.6 20.0 20.8
OPM (%) 20.0 20.2 19.4 19.7
EPS (Rs) 55.4 67.9 81.5 98.5
P/E (x) 51.7 42.2 35.1 29.1 Anand Shah
P/BV (x) 58.4 47.5 36.9 32.4 Tel: 022 – 4040 3800 Ext: 334
E-mail: anand.shah@angeltrade.com
RoE (%) 119.8 124.2 118.2 118.6
RoCE (%) 160.7 164.3 150.1 148.5
Chitrangda Kapur
EV/Sales (x) 6.3 5.3 4.5 3.9
Tel: 022 – 4040 3800 Ext: 323
EV/EBITDA (x) 31.8 26.6 23.4 19.9 E-mail: chitrangda.kapur@angeltrade.com
Source: Company, Angel Research
1
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

2. Nestle I 1QCY2010 Result Update
Exhibit 1: Quarterly Performance Update
Y/E Dec (Rs cr) 1QCY10 1QCY09 % chg CY2009 CY2008 % chg
Net Sales 1,479.8 1,265.9 16.9 5,129.4 4,324.2 18.6
RM Cost 737.6 597.7 23.4 2,448.4 2,104.1 16.4
(% of Sales) 49.8 47.2 47.7 48.7
Staff Cost 99.8 87.4 14.2 432.4 314.6 37.4
(% of Sales) 6.7 6.9 8.4 7.3
Other Exp. 338.4 270.6 25.1 1,214.2 1,042.0 16.5
(% of Sales) 22.9 21.4 23.7 24.1
Total Exp. 1,175.8 955.6 23.0 4,095.0 3,460.7 18.3
Operating Profit 304.0 310.3 (2.0) 1,034.4 863.6 19.8
OPM (%) 20.5 24.5 20.2 20.0
Interest 0.6 0.2 1.4 1.6 (14.6)
Depreciation 31.0 25.6 21.1 111.3 92.4 20.5
Other Income 9.1 9.7 (6.3) 37.9 34.1 11.2
PBT(excl Ext. Items) 281.6 294.3 (4.3) 959.6 803.6 19.4
Extr Income/(Exp.) 4.8 (10.5) (42.6) (30.8)
PBT(incl Ext. Items) 286.4 283.7 0.9 917.0 772.8 18.7
(% of Sales) 19.4 22.4 17.9 17.9
Prov. for Taxation 84.5 86.4 (2.2) 262.0 238.7 9.7
(% of PBT) 30.0 29.4 27.3 29.7
Recurring PAT 197.1 207.8 (5.2) 697.6 564.9 23.5
PATM (%) 13.3 16.4 13.6 13.1
Reported PAT 201.9 197.3 2.3 655.0 534.1 22.6
Equity Shares (cr) 9.6 9.6 9.6 9.6
EPS (Rs) 20.9 20.5 67.9 55.4
Source: Company, Angel Research
Top-line growth at 17% tad below expectations, Exports signal recovery
Nestle registered a modest Top-line growth of 16.9% yoy to Rs1,480cr (Rs1,266cr)
marginally below our estimate of Rs1,522cr, an 20.2% growth. Top-line growth was
aided by steady growth in its Net Domestic Sales (up 16.7% yoy to Rs1,391cr
supported by higher volumes and limited price increases). New innovations
introduced during last couple of quarters (like Masale-ae-Magic and Rasile Chow in
Maggi) and focus on LUP (low priced points) and PPP (Popularly positioned points)
boosted volume growth. Export Sales registered a positive growth of 20.4% yoy to
Rs89cr despite appreciation of the India Rupee against the US Dollar indicating signs
of volume recovery.
Margin pressure, higher Tax rate limit Bottom-line growth to muted 2.3%
Bottom-line (on a reported basis) registered a muted growth of 2.3% yoy to Rs202cr
(Rs197cr) significantly below our expectation of a 18.6% growth to Rs234cr largely
impacted due to significant spike up in input costs. Moreover, decline in Other
Income by 6.3% yoy (due to lower yields on investments partially offset by higher
liquidities) and 60bp jump in Tax rate to 30% as against our expectation of higher
tax savings due to ramp up in Pantnagar facility (as witnessed in past three quarters)
also impacted Bottom-line growth.
Input costs spike, OPM contracts 397bp
Significant spike up in input costs (Milk up 30% yoy, Sugar up 70% yoy and Wheat
up 25% yoy, highest in last 10 years) adversely impacted Nestle’s Gross Margins this
quarter which contracted by 263bp yoy. Moreover, high investments into brands and
distribution capabilities coupled with limited/staggered price increases and 150bp
yoy jump in Other Expenditure (due to recovery in fuel prices) led to a sharp Margin
contraction of 397bp yoy at the EBITDA level. Hence, EBITDA registered a decline of
2% yoy to Rs304cr (Rs310cr).
April 22, 2010 2

3. Nestle I 1QCY2010 Result Update
Outlook and Valuation
Post 1QCY2010 results, we have revised our Earnings estimates for Nestle
marginally downwards by 3-5% to factor in higher-than-expected rise in input costs,
jump in Other Expenditure (due to higher fuel costs), higher brand investments (due
to rising competition particularly in Noodles category) and lower Tax savings in the
current year (model in a Tax rate of 26% and 24.5% for CY2010E and CY2011E
respectively). However, we have maintained our Top-line estimates and note that
there could be upside risks to same given Nestle’s strong pricing power (has only
taken limited/staggered price hikes in recent quarters).
Exhibit 2: Revision in Estimates
Old Estimate New Estimate % chg
(Rs cr) CY10E CY11E CY10E CY11E CY10E CY11E
Revenue 6,015 6,956 6,015 6,956 - -
OPM (%) 20.1 20.0 19.4 19.7 (73bp) (36bp)
Net Profit 86.0 101.4 81.5 98.5 (5.2) (2.9)
Source: Company, Angel Research
At the CMP of Rs2,865, the stock is trading at rich valuations of 29.1x CY2011E
revised EPS of Rs98.5. Nestle justifies its premium valuations compared to its peers
on account of its global parent support, strong brand recall, excellent Return Ratios
and superior EBITDA Margins. However, at current levels, we believe the stock leaves
little room for upside and negative surprises given significant spike up in input costs
and rising competitive pressures (particularly in Noodles category). Hence, we
downgrade the stock to Neutral from Accumulate with a revised Fair value of
Rs2,841 (Rs2,925) and await better entry opportunities in the stock.
Exhibit 2: 1-year forward P/E band
3,000 20x 24x 28x 32x
2,800
2,600
2,400
2,200
2,000
1,800
Share Price (Rs)
1,600
1,400
1,200
1,000
800
600
400
200
-
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Source: Bloomberg, Angel Research
April 22, 2010 3

4. April 22, 2010
-
0%
20%
40%
60%
80%
100%
120%
140%
160%
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
Apr-02 Apr-02
Aug-02 Aug-02
Dec-02 Dec-02
Apr-03 Apr-03
Aug-03 Aug-03
Dec-03 Dec-03
Apr-04 Apr-04
Source: Bloomberg, Angel Research
Source: Bloomberg, Angel Research
Aug-04 Aug-04
Dec-04 Dec-04
Exhibit 3: 1-year forward P/E Chart
Apr-05 Apr-05
Aug-05 Aug-05
Dec-05 Dec-05
Apr-06 Apr-06
Aug-06 Aug-06
Exhibit 4: 1-year forward Premium to Sensex Chart
Dec-06 Dec-06
Apr-07 Apr-07
Aug-07 Aug-07
Dec-07 Dec-07
Apr-08 Apr-08
Aug-08 Aug-08
Dec-08 Dec-08
Apr-09 Apr-09
Aug-09 Aug-09
Dec-09 Dec-09
Apr-10 Apr-10
Nestle I 1QCY2010 Result Update
4

5. Nestle I 1QCY2010 Result Update
Profit & Loss Statement Rs crore
Y/E Dec CY2006 CY2007 CY2008 CY2009 CY2010E CY2011E
Gross sales 2,944 3,647 4,471 5,222 6,156 7,138
Less: Excise duty 128 143 147 93 142 182
Net Sales 2,816 3,504 4,324 5,129 6,015 6,956
Other operating income - - - - - -
Total operating income 2,816 3,504 4,324 5,129 6,015 6,956
% chg 13.7 24.4 23.4 18.6 17.3 15.6
Total Expenditure 2,275 2,808 3,461 4,095 4,848 5,587
Cost of Materials 1,320 1,685 2,104 2,448 2,957 3,441
Advertising Exp 149 172 194 268 355 424
Personnel 211 263 307 432 463 522
Others 594 688 855 947 1,074 1,200
EBITDA 542 696 864 1,034 1,167 1,369
% chg 3.7 28.6 24.1 19.8 12.8 17.4
(% of Net Sales) 19.2 24.7 30.7 36.7 41.4 48.6
Depreciation& Amortisation 66 75 92 111 120 133
EBIT 475 622 771 923 1,046 1,236
% chg 2.2 30.8 24.1 19.7 13.3 18.2
(% of Net Sales) 16.9 22.1 27.4 32.8 37.2 43.9
Interest & other Charges 0 1 2 1 1 1
Other Income 21 25 34 38 43 49
(% of PBT) 4.2 3.9 4.2 3.9 4.0 3.8
Share in profit of Associates - - - - - -
Recurring PBT 495 646 804 960 1,088 1,284
% chg 1.4 30.4 24.4 19.4 13.4 18.0
Extraordinary Expense/(Inc.) 15 18 31 43 58 20
PBT (reported) 481 629 773 917 1,030 1,264
Tax 165 215 239 262 283 315
(% of PBT) 33.4 33.2 29.7 27.3 26.0 24.5
PAT (reported) 315 414 534 655 747 950
Add: Share of associates - - - - - -
Less: Minority interest (MI) - - - - - -
PAT after MI (reported) 315 414 534 655 747 950
ADJ. PAT 330 431 565 698 805 970
% chg 0.2 30.7 31.0 23.5 15.4 20.4
(% of Net Sales) 11.7 12.3 13.1 13.6 13.4 13.9
Basic EPS (Rs) 32.7 42.9 55.4 67.9 81.5 98.5
Fully Diluted EPS (Rs) 32.7 42.9 55.4 67.9 81.5 98.5
% chg 1.8 31.3 29.1 22.6 20.0 20.8
April 22, 2010 5

6. Nestle I 1QCY2010 Result Update
Balance Sheet Rs crore
Y/E Dec CY2006 CY2007 CY2008 CY2009 CY2010E CY2011E
SOURCES OF FUNDS
Equity Share Capital 96 96 96 96 96 96
Share Warrants - - - - - -
Reserves& Surplus 292 322 377 485 652 756
Shareholders Funds 389 418 473 581 749 852
Minority Interest - - - - - -
Total Loans 16 3 0 0 0 0
Deferred Tax Liability 19 29 37 32 32 32
Total Liabilities 424 450 510 613 781 884
APPLICATION OF FUNDS
Gross Block 1,058 1,180 1,405 1,641 1,823 2,046
Less: Acc. Depreciation 516 578 652 745 865 998
Net Block 542 602 753 896 958 1,048
Capital Work-in-Progress 38 74 109 80 109 102
Goodwill - - - - - -
Investments 78 94 35 203 228 253
Current Assets 535 638 798 857 1,120 1,344
Cash 76 38 194 156 304 418
Loans & Advances 127 145 124 138 156 174
Other 332 455 481 563 660 753
Current liabilities 769 958 1,185 1,422 1,635 1,863
Net Current Assets (234) (320) (387) (566) (515) (519)
Mis. Exp. not written off - - - - - -
Total Assets 424 450 510 613 781 884
Cash Flow Statement Rs crore
Y/E Dec CY2006 CY2007 CY2008 CY2009 CY2010E CY2011E
Profit before tax 481 629 773 917 1,069 1,264
Depreciation 66 75 92 111 120 133
Change in Working Capital 18 8 84 131 127 95
Interest / Dividend (Net) (5) (4) (13) (13) (16) (18)
Direct taxes paid 165 215 239 262 283 315
Others 21 22 21 (14) 56 23
Cash Flow from Operations 416 514 719 871 1,074 1,183
Inc./ (Dec.) in Fixed Assets (124) (157) (261) (206) (212) (216)
Inc./ (Dec.) in Investments 27 (17) 60 (168) (25) (25)
Cash Flow from Investing (98) (174) (201) (375) (237) (241)
Issue of Equity - - - - - -
Inc./(Dec.) in loans 2 (13) (3) 0 0 0
Dividend Paid (Incl. Tax) 285 370 372 547 705 846
Interest / Dividend (Net) (5) (4) (13) (13) (16) (18)
Cash Flow from Financing (279) (379) (362) (534) (689) (828)
Inc./(Dec.) in Cash 40 (39) 156 (38) 148 114
Opening Cash balances 37 76 38 194 156 304
Closing Cash balances 76 38 194 156 304 418
April 22, 2010 6

7. Nestle I 1QCY2010 Result Update
Key Ratios
Y/E Dec CY2006 CY2007 CY2008 CY2009 CY2010E CY2011E
Valuation Ratio (x)
P/E (on FDEPS) 87.7 66.8 51.7 42.2 35.1 29.1
P/CEPS 72.4 56.5 44.1 36.1 30.5 25.5
P/BV 71.0 66.0 58.4 47.5 36.9 32.4
Dividend yield (%) 0.9 1.2 1.5 1.7 2.2 2.6
EV/Sales 9.7 7.8 6.3 5.3 4.5 3.9
EV/EBITDA 50.9 39.6 31.8 26.6 23.4 19.9
EV / Total Assets 65.0 61.3 53.8 44.8 35.0 30.8
Per Share Data (Rs)
EPS (Basic) 32.7 42.9 55.4 67.9 81.5 98.5
EPS (fully diluted) 32.7 42.9 55.4 67.9 81.5 98.5
Cash EPS 39.6 50.7 65.0 79.5 94.0 112.3
DPS 25.5 33.0 42.5 48.5 62.5 75.0
Book Value 40.3 43.4 49.1 60.3 77.7 88.4
Returns (%)
RoCE (Pre-tax) 118.4 142.2 160.7 164.3 150.1 148.5
Angel RoIC (Pre-tax) 124.7 141.1 180.9 250.4 307.8 403.9
RoE 84.8 102.5 119.8 124.2 118.2 118.6
Turnover ratios (x)
Asset Turnover (Gross Block) 2.7 3.0 3.1 3.1 3.3 3.4
Inventory / Sales (days) 35.8 41.8 36.7 35.5 35.3 34.4
Receivables (days) 7.2 5.6 3.8 4.6 4.8 5.1
Payables (days) 48.0 47.9 42.8 41.8 41.6 41.4
April 22, 2010 7

8. Nestle I 1QCY2010 Result Update
Research Team Tel: 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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April 22, 2010 8