Merrill Lynch has recommended sell rating on Nestle India. Nestle trades at P/E of 32x Dec 07E and 27x Dec 08E.
Rich valuation; reiterate Sell
Nestle trades at P/E of 32x Dec 07E and 27x Dec 08E. This compares to its peer group trading at 21x Dec 08E. On a PEG basis, it is at 1.4x versus 1x for our Buy rated stocks.
Topline growth recovery priced in
Nestle recently surprised the market with 23% growth in sales. We believe the recovery in its sales growth is priced in, with the stock up 34% over the last 4 months. But the market appears to be ignoring the continuing high raw material prices.
Robust sales growth likely to continue….
We forecast Nestle's sales to grow 22% in the current year, up from 14% last year. The recovery is across all categories, but notably so in coffee and growth has further accelerated in Maggi noodles. Beyond 2007, we forecast topline growth of 16% led primarily by volumes vs. the volume plus price benefit in 2007.
…But raw material costs remain a risk
Raw materials account for 48% of turnover and the largest cost items are milk and coffee, followed by vegetable oils and wheat. Milk and coffee prices have risen sharply over the last two years and we are forecasting flat prices next year. The rise in vegetable oils and wheat is more recent, and while we are forecasting flat prices for these also in 2008, the risk appears on the upside.
Earnings forecast to grow 22% over 2006-2008E
We are tweaking up our estimates by 3-4% and forecast EPS of Rs 40.7 in 2007E and Rs 48.5 in 2008E. Key risk to our EBITDA margin expansion of 30bp in 2008 is the continuing high raw material prices.
Rich valuation; reiterate Sell
Nestle trades at P/E of 32x Dec 07E and 27x Dec 08E. This compares to its peer group trading at 21x Dec 08E. On a PEG basis, it is at 1.4x versus 1x for our Buy rated stocks.
Topline growth recovery priced in
Nestle recently surprised the market with 23% growth in sales. We believe the recovery in its sales growth is priced in, with the stock up 34% over the last 4 months. But the market appears to be ignoring the continuing high raw material prices.
Robust sales growth likely to continue….
We forecast Nestle's sales to grow 22% in the current year, up from 14% last year. The recovery is across all categories, but notably so in coffee and growth has further accelerated in Maggi noodles. Beyond 2007, we forecast topline growth of 16% led primarily by volumes vs. the volume plus price benefit in 2007.
…But raw material costs remain a risk
Raw materials account for 48% of turnover and the largest cost items are milk and coffee, followed by vegetable oils and wheat. Milk and coffee prices have risen sharply over the last two years and we are forecasting flat prices next year. The rise in vegetable oils and wheat is more recent, and while we are forecasting flat prices for these also in 2008, the risk appears on the upside.
Earnings forecast to grow 22% over 2006-2008E
We are tweaking up our estimates by 3-4% and forecast EPS of Rs 40.7 in 2007E and Rs 48.5 in 2008E. Key risk to our EBITDA margin expansion of 30bp in 2008 is the continuing high raw material prices.
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