Quick Comment

March 25, 2013

Rating matrix
Rating Target Target Period Potential Upside : : : : Hold | 4993 12 months 6%

Nestl India (NESIND)

| 4707
CY14E 11,094.1 2,445.1 1,403.5 145.6

Key Financials
| Crore Net Sales EBITDA Net Profit EPS (|) CY11 7,491 1,552.8 961.6 99.7 CY12 8,302.3 1,824.0 1,067.9 110.8 CY13E 9,694.4 2,147.3 1,239.9 128.6

Royalty to increase to 4.5% by CY18

Nestl Indias board has approved a 1.1% increase in royalty payment to its Swiss based parent, Nestle SA, from January 1, 2014 onwards. The increase will be effected in a staggered manner with an increase of 20 bps each year spread over a period of five years. Consequently, Nestls royalty payment would be increased from 3.5% in CY13E to 4.5% by CY18E. The increase by 0.2% in CY14E would impact the earnings by ~| 22 crore, bringing down the EPS by ~| 2/share to | 145.6. We believe that given the high EBITDA margins (~22% in CY14E) and comfortable earnings (~13% in CY14E) of Nestl, the impact until CY14E is mild. We are revising down our target price to | 4993/share, led by the marginal cut in EPS estimate. We have a HOLD rating on the stock. In spite of the increase in royalty, Nestl would benefit from the prevailing high margins (22% in CY14E) until CY14E. However, the impact thereafter needs to be watched. Going ahead, we believe that in order to sustain the current high margins, Nestl will have to pass on the increase in royalty through price increases. This, in turn, would impact the already strained volume growth of the company. Nestls volume growth slowed down to ~6% in the past two years from ~16% in CY08-11. This has been led by the increasing competition in its key categories from players such as ITC in noodles (brand Sunfeast), Britannia and Danone in milk, HUL and Tata Global in beverages and Cadburys in chocolates. Further, the slowing consumer demand has kept the demand for the companys premium priced products low. Hence, going ahead, if price increases are continued by the company to pass on the higher royalty, volume growth could remain subdued with revenue growth being largely price led. We have revised our target price downwards to | 4993/share led by the cut in EPS to | 145.6/share. We have a HOLD rating on the stock.

Valuation summary
P/E (Adjusted) Mkt Cap/Sales EV / EBITDA P/BV Price / Sales RoNW RoCE CY11 44.5 6.1 29.8 35.6 6.1 75.5 62.3 CY12 42.7 5.5 25.3 25.2 5.5 59.4 54.1 CY13E 36.6 4.7 21.4 20.6 4.7 56.4 61.1 CY14E 32.3 4.1 18.3 20.1 4.1 62.1 90.4

Stock data
Market Capitalization Total Debt (CY12) Cash and Investments (CY12) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%) 45,382.9 1,050.2 236.9 46,196.2 5040 / 4306 96.4 | 10 7.3 11.3

Analysts name
Sanjay Manyal sanjay.manyal@icicisecurities.com Parineeta Poddar parineeta.poddar@icicisecurities.com

ANALYST CERTIFICATION
We /I, Sanjay Manyal MBA, Parineeta Poddar MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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