Research firm SSKI has recommended an outperformer rating on Nestle India with target price of Rs 1500. At CMP, the stock is trading at the valuations of 19.8x CY08E earnings.
SSKI report on Nestle India:
Continuing to impress with strong growth momentum, Nestle has reported revenue surge of 23% at Rs 8.4 billion in Q2CY07. We are highly impressed for the fact that this is the second quarter in succession that domestic operations have grown at over 20% (at 24% in Q2CY07). This comes, while the broader market is growing at 12- 14%. EBITDA growth during the quarter is at 20% at Rs 1.6 billion and PAT growth at 18% at Rs 957 million. We have always believed that Nestle, with the product categories that it operates in as also the stable of brands like Nestlé, Maggi, Nescafe etc, is best suited to India consumerization story. We believe that Nestle has turned the corner with domestic business growing in double digit for the last nine quarters in succession and now the growth trajectory moving to over 20%. Our interaction with the management also comforts us of Nestle's newly gained aggression and ability to sustain the growth momentum. This has prompted us to upgrade our earnings for CY07 and CY08 by 9% and 18% respectively. At current valuations of 19.8x CY08E earnings, we reiterate our Outperformer call and set a price target of Rs 1500 (26% upside from current levels).
HIGHLIGHTS OF Q2CY07 RESULTS
Impresses one again!
For second quarter in succession, Nestle reports revenue growth at over 20%. With domestic operations growing at 24% and exports at 16%, Nestle's revenues have surged by 23% at Rs 8.4 billion in Q2CY07. Nestle has up its ante in sales and distribution and is now beginning to capitalize upon the changing consumer preferences, shift towards branded and packed foods and rural penetration. This is the ninth quarter in succession of double digit growth in the domestic operations and the growth is further picking momentum in the last two quarters, where in domestic sales has grown by over 20%. EBITDA margins during the quarter have shrunk by 84bp at 19.5%, however, if adjusted for one off items, EBITDA has improved by 140bp. While reported PAT is up by 18% at Rs 957 million, adjusted PAT (excluding one time charges) has grown by 32%.
The wait is over, time to capitalize
Rapid pick up of sales momentum in Nestle's domestic operations was long overdue. We have always maintained with changing consumption patterns, movement from unbranded to branded foods and rollout of modern retail formats are best triggers for growth in Nestle. We believe that with the product categories that Nestle is present in (prepared dishes, milk products, confectioneries and coffee) and strong stable of brands (Nestle, Nescafe, Maggi, Everyday, etc), Nestle is best suited to ride upon the India consumerization story. However, what had restrained Nestle from growing at over 20% was lack of aggression. Nestle for long was satisfied tracking growth at just over GDP and was under achieving to its potential. However, finally Nestle has turned the corner and that is demonstrated in the recent performances. From our interaction with the management we get the comfort over increasing aggression in management approach and sustainability of the growth momentum as seen in the recent times.
Reiterate Outperformer – price target of Rs 1500
As nestle leverages upon favourable demand conditions and newly found aggression, Nestle promises high earnings visibility. This has prompted us to upgrade our earnings estimates for CY07 and CY08 by 9% and 18% respectively. Currently trading at 20x CY08E earnings, we see immense upside in the stock from the current levels. Maintaining our Outperformer call on the stock we set a price target of Rs 1500.
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