Sunday, April 24, 2011

Nestle - RU1QCY2011 - Reduce

Result Update on Nestle for 1QCY2011 with a Reduce recommendation and a Target Price of `3483.


Nestle reported strong set of numbers for 1QCY2011, beating our expectations by ~2% both on the top-line and earnings fronts. The company's top line grew by 22.3% yoy (largely driven by domestic volumes), while earnings grew by ~26.7% yoy (against our expectation of 24.8% yoy growth). During the quarter, Nestle's margin expanded on the back of cost rationalisation and robust top-line growth. Post 1QCY2011 results, we have tweaked our estimates. We maintain our Reduce view on the stock with a target price of `3,483.


Strong top line boosts results, gross margin recovers, though still under pressure: Nestle registered robust top-line growth of 22.3% yoy to `1,810cr, driven by steady growth in its net domestic sales (up 23.1% yoy to `1,712cr, supported by steady volume growth and higher realisations across categories). Earnings (on a reported basis) registered 26.7% yoy growth to `255.7cr, aided by margin expansion. Gross margin expanded by 100bp yoy due to improved product/channel mix and discontinuing of free goods promotion by the company, despite higher cost inflation in milk and sugar prices.


Outlook and valuation: At the CMP, Nestle is trading at ~139% premium to the Sensex, significantly ahead of its five-year average historical premium of ~78%. We render caution on Nestle's high premium to the Sensex on account of 1) gross margin pressures due to rising input costs and 2) competition in the high-growth noodles category from HUL (Knorr Soupy Noodles), GSKCHL (Horlicks Foodles) and ITC (Sunfeast Yipee). Hence, we maintain our Reduce view on the stock with a revised target price of `3,483 (`3,503).

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