Nsetle - BUY

Management sounded positive about the company's growth prospects and was encouraged by performance in various sub-segments. Based on our estimate of 22% earnings CAGR over CY10-12e, we maintain our Buy recommendation.

n       Aggressive investments. Nestlé India is investing `200bn in greenfield expansions to increase capacities across sub-segments. As it sees mounting consumer demand in all segments, the company is incurring the greatest capex over the past decade.

n       Maggi and chocolate sub-segments doing well. Maggi noodles and the chocolate sub-segments were expected to be pressured by, respectively, keener competition and pricing issues. In both, however, the company has seen strong double-digit growth. Management is enthused by the performance of Maggi Pazzta, which has turned market leader.

n       Higher raw material costs. Management, however, is concerned about raw material prices trending up. Though it has passed on the higher costs through price hikes, it expects the sustained momentum in raw material prices to cut into margins.

n       Valuation and risks. We value the stock at target price of `4,096, based on target PE of 32x CY12e earnings. In the past ten years, the stock has traded at an average PE of 25x. Considering the healthy growth ahead and higher return ratios, we expect it to trade at premium multiples. Key risks are higher raw material prices and increase in competitive pressure.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.