Nestle India-Sweet As Ever

Ali On Content / 25 Apr 2011

With the FMCG sector expected to do well riding on the consumption-led growth story of India, particularly the opportunity that is available in the rural market, it makes sense to be invested in these companies. One such company that has been there for ages on the Indian scene is Nestle. The company has witnessed a double digit growth for the past 16 consecutive quarters. It has improved its product mix and the pricing power that it enjoys in the milk and nutrition product segments has helped it to witness better margins for the recently concluded Q4CY11 on a YoY basis. It has a strong presence in the noodles segment wherein it has been a pioneer and enjoys a strong brand recall in ‘Maggi’. ‘Maggi’ is a market leader in this segment and enjoys a market share of close to 80 per cent in the instant noodles category. However, going forward, it is likely to witness higher competitiveness as competing products come to the market from companies like HUL and GSK. The total market size of this category is Rs 1000 crore and the same is growing at 20 per cent per annum. Nestle is betting big on this brand and segment.

The company is likely to witness improvement in margins as raw material prices are likely to come down. This is because wheat prices are expected to soften in the next two to three months owing to the bumper wheat harvest in 2011, which will arrive in the market by mid-April 2011.

The company’s business is categorised in four main segments, comprising milk products and nutrition, beverages, prepared dishes and cooking aids and chocolate and confectionary, which have respectively contributed to 44.4 per cent, 13.6 per cent, 27.5 per cent and 14.5 per cent of its sales for CY10. Prepared dishes and cooking aids and chocolate and confectionary are two segments that have witnessed an increase in their share of contribution to the revenue of the company compared to the corresponding period.

On the financial front, the company has witnessed a better topline and bottomline growth on a YoY basis for CY10. The topline witnessed a growth of 22 per cent on YoY basis and stands at Rs 6273 crore as against Rs 5150 crore for CY09. The bottomline witnessed a growth of 25 per cent on YoY basis and stands at Rs 818 crore as against Rs 655 crore for CY09. For the last three years, the company has witnessed a CAGR of 21.34 per cent and 24.49 per cent on its sales and net profits respectively. Another important point to be considered is Nestle's aggressive capex plans. It has earmarked Rs 1500 crore for capex and this is likely to play its part in maintaining the growth trajectory of the company.

Coming to valuation, the company discounts its CY11 earnings by 43 times. Almost all FMCG companies are commanding a higher valuation with that of HUL standing at 33 times, GSK Consumer at 36 times and ITC at 41 times. In case of Nestle its EV/EBITDA stands at 28.01 times and the company is debt-free. We recommend an investment in the stock for a return of 15 to 20 per cent from the current market price with a time horizon of one year.

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