Nestle India Ltd

Result Update: Q3 FY 11

C.M.P: Target Price: Date:

Rs.3540.40 Rs.4001.00 March 19th 2011

BUY
SYNOPSIS

Stock Data: Sector: Face Value Rs. 52 wk. High/Low (Rs.) Volume (2 wk. Avg.) BSE Code Market Cap (Rs.In mn) FMCG 10.00 4199.40/2570.00 9757.0 500790 341365.3

Nestl India, one the biggest players in FMCG segment, has a presence in milk & nutrition, beverages, prepared dishes & cooking aids & chocolate & confectionery segments. During the quarter ended, the robust growth of revenue is increased by 23.41% Rs.16755.20 million. Companys manufacturing unit has expansion plans at Nanjangud, samalkha and ponda on track. Company has acquired land for new plant at Tahliwal.

Share Holding Pattern

1 Year Comparative Graph

Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 19% over 2009 to 2012E respectively. Company had made domestic sales of Rs.5901.0 cr.

Nestle India Ltd

BSE SENSEX

Years CY 10 CY 11E CY 12E

Net sales 62736.4 72146.8 83690.3

EBITDA 12739.3 14623.3 17206.1

Net Profit 8186.6 9424.2 11157.7

EPS 84.91 97.74 115.72

P/E 41.70 36.22 30.59

Peer Group Comparison

Name of the company Nestle India ITC Dabur HUL CMP(Rs.) 3540.40 167.80 96.70 268.50 Market Cap.(Rs.Mn.) 341365.3 1296700.3 168328.0 585952.9 EPS(Rs.) 84.91 6.13 2.55 10.62 P/E(x) 41.70 27.37 37.92 25.28 P/Bv(x) 24.38 9.25 22.44 22.68 Dividend (%) 485.00 1000.00 200.00 650.00

Company Profile
Nestle has its presence in India for around nine decades, making it one of the oldest company in India. Nestl India is a subsidiary of Nestl SA of Switzerland. The company has its headquarters at Gurgaon near Delhi and has seven factories spread all over India. It started its journey in India in 1912 by entering into the dairy business. Nestl India, one the biggest players in FMCG segment, has a presence in milk & nutrition, beverages, prepared dishes & cooking aids & chocolate & confectionery segments. Nestle has created brands like Nestl Milkmaid, Nestl Everyday, Maggi Noodles, Maggi Soups, Polo, Kit Kat, Nescafe & many more. As per the market-wise position Nestl India stands first in instant noodles & ketchups, second in healthy soups, No.1 in instant coffee, & No.2 in overall chocolate category. Nestle India continuously focuses on understanding changing lifestyles in India. This helps it to foresee needs in hts product offerings. The company innovates new product & renovates existing one providing high quality, safe food products at affordable prices.

Segments Milk Products & Nutrition Beverages Prepared dishes & cooking Aids Chocolates & Confectionery

Investment Highlights

Q4 CY10 Results Update FMCG major Nestle India has posted 80.13% rise of net profit in its standalone earnings for the quarter ended Dec 2010. During the quarter Net profit is increased to Rs 2034.00 million for the quarter ended Dec. 31, 2010 as compared to Rs 1129.20 million for the quarter ended Dec. 31, 2009. Net sales for the quarter is surged by 23.41% to Rs.16755.20 million from Rs.13576.60 million as compared to same quarter corresponding year. Total income has increased by 23.67% from Rs.13623.50 million for the quarter ended Dec. 31, 2009 to Rs 16848.60 million for the quarter ended Dec. 31, 2010. The EPS of the company is stood at Rs.21.10for the quarter ended Dec 31, 2010.

Quarterly Results - Standalone (Rs in mn)

As At Net sales PAT Basic EPS

Dec-10 16755.20 2034.00 21.10

Dec-09 13576.60 1129.20 11.71

%change 23.41 80.13 80.13

Break up of Expenditure

CY10 performance Nestle India has disclosed a decent number of Net Profit for the year ended December 31 2010. Net profit after tax of Rs 8186.60 million for the year ended December 31, 2010 whereas the same was at Rs 6550.00 million for the year ended December 31, 2009 with growth of 25%. Net sales for the year are rose by 22% to Rs 62736.40 million, while total income for the year rose 22% to Rs 62974.00 million, when compared with last year. The company EPS is stood at Rs.84.91 with a growth of 25% over the last year.

Recommendation of dividend Nestle India Ltd has recommended a final dividend for the year 2010 of Rs. 12.50 per equity share (nominal value Rs.10/- per equity share). In addition to the two interim dividends for 2010, of Rs.9.00 & Rs.27.00 per equity share paid in May 2010 and November 2010 respectively.

Increase of borrowing limits Nestle India Ltd has Proposed for approval of the shareholders, increase in the borrowing limits of the Company upto a maximum of Rs. 2500 Crores, in aggregate; and taken on record the in-principle approval received from Reserve Bank of India for availing External Commercial Borrowings of upto USD 450 Million over a period of time, in tranches, from the foreign equity holders for the funding of modernization / expansion of existing new projects and sourcing of capital goods.

Financial Results

12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Deprecation Profit Before Tax Tax Profit After Tax Equity capital Reserves Face value EPS CY09 12m 51499.90 171.80 51671.70 -41219.80 10451.90 -169.50 10282.40 -1112.70 9169.70 -2619.70 6550.00 964.20 4848.50 10.00 67.93 CY10 12m 62736.40 237.60 62974.00 -50234.70 12739.30 -10.70 12728.60 -1277.50 11451.10 -3264.50 8186.60 964.20 7590.00 10.00 84.91 CY11E 12m 72146.86 266.11 72412.97 -57789.63 14623.34 -11.77 14611.57 -1430.80 13180.77 -3756.52 9424.25 964.20 17014.25 10.00 97.74 CY12E 12m 83690.36 300.71 83991.06 -66784.91 17206.16 -12.71 17193.45 -1588.19 15605.26 -4447.50 11157.76 964.20 28172.01 10.00 115.72

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) Description Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Deprecation Profit Before Tax Tax Profit After Tax Equity capital Face value EPS

30-Jun-10 3m 14713.00 55.30 14768.30 -11794.10 2974.20 -3.70 2970.50 -303.90 2666.60 -718.20 1948.40 964.20 10.00 20.21

30-Sep-10 3m 16414.00 54.00 16468.00 -13108.20 3359.80 -28.50 3331.30 -305.80 3025.50 -839.90 2185.60 964.20 10.00 22.67

31-Dec-10 3m 16755.20 93.40 16848.60 -13594.70 3253.90 -1.00 3252.90 -357.90 2895.00 -861.00 2034.00 964.20 10.00 21.10

31-Mar-11E 3m 18263.17 100.87 18364.04 -14519.22 3844.82 -1.10 3843.72 -375.80 3467.93 -988.36 2479.57 964.20 10.00 25.72

Key Ratios

Particulars No. of Shares(In Million) EBITDA Margin (%) PBT Margin (%) PAT Margin (%) P/E Ratio (x) ROE (%) ROCE (%) EV/EBITDA (x) Book Value (Rs.) P/BV

CY09 96.42 20.29% 17.81% 12.72% 52.12 112.68% 198.95% 32.66 60.29 58.73

CY10 96.42 20.31% 18.25% 13.05% 41.7 95.70% 163.86% 26.8 88.72 39.91

CY11E 96.42 20.27% 18.27% 13.06% 36.22 52.42% 89.30% 23.34 186.46 18.99

CY12E 96.42 20.56% 18.65% 13.33% 30.59 38.30% 64.51% 19.84 302.18 11.72

Charts:

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Outlook and Conclusion

At the current market price of Rs.3540.40, the stock is trading at 36.22 x CY11E and 30.59 x CY12E respectively. Earning per share (EPS) of the company for the earnings for CY11E and CY12E is seen at Rs.97.74 and Rs.115.72 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 19% over 2009 to 2012E respectively. On the basis of EV/EBITDA, the stock trades at 23.34 x for CY11E and 19.84 x for CY12E. Price to Book Value of the stock is expected to be at 18.99 x and 11.72 x respectively for CY11E and CY12E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.4001.00 for Medium to Long term investment.

Industry Overview
Fast Moving Consumer Goods (FMCG) goods are popularly named as consumer packaged goods. Items in this category include all consumables (other than groceries/pulses) people buy at regular intervals. The most common in the list are toilet soaps, detergents, shampoos, toothpaste, shaving products, shoe polish, packaged foodstuff, household accessories and extends to certain electronic goods. These items are meant for daily of frequent consumption and have a high return. A major portion of the monthly budget of each household is reserved for FMCG products. The volume of money circulated in the economy against FMCG products is very high, as the number of products the consumer use is very high. Competition in the FMCG sector is very high resulting in high pressure on margins

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FMCG companies maintain intense distribution network. Companies spend a large portion of their budget on maintaining distribution networks. New entrants who wish to bring their products in the national level need to invest huge sums of money on promoting brands. Manufacturing can be outsourced. A recent phenomenon in the sector was entry of multinationals and cheaper imports. Also the market is more pressurized with presence of local players in rural areas and state brands Scope of the Sector The Indian FMCG sector with a market size of Rs.85,000 crore is the fourth largest sector in the economy. A well-established distribution network, intense competition between the organized and unorganized segments characterizes the sector. The Rs.85,000 crore FMCG market in India is growing at a fast pace despite of the economic downtrend. The increasing disposable income and improved standard of living in most tier II and tire III cities are spearheading the FMCG growth across the nation. The changing profile and mind set of the consumers has shifted the thought to Value for Money from Money for Value. According to a FICCI-Technopak report, India's FMCG sector is poised to reach US$ 43 billion by 2013 and US$ 74 billion by 2018. The report states that implementation of the proposed goods and services tax (GST) and the opening of foreign direct investment (FDI) are expected to fuel growth further and raise the industry's size to US$ 47 billion by 2013 and US$ 95 billion by 2018. According to a study by research firm The Nielson Company, the fast moving consumer goods market (FMCG) in rural India is tipped to touch US$100 billion by 2025 on the back of "unrelenting" demand driven by rising income levels. According to the study, rural India accounts for more than half of sales in some of the largest FMCG categories. At present, rural consumers spend about US$ 9 billion per annum on FMCG items and product categories such as instant noodles, deodorant and fabric, with the pace of consumption growing much faster than urban areas, as per the findings.

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The industry will witness a spate of acquisitions & mergers in the 2010. There will be a renewed focus on rural consumers too, by an analyst based in Mumbai. The fast moving consumer goods (FMCG) sector is expected to grow 13 per cent during FY 2010-11 on the back of strong economic growth, a good monsoon and subsequent rise in rural income, according to an industry body. Over the years companies like HUL, ITC and Dabur have improved performance with innovation and strong distribution channels. Their key categories have strengthened their presence and outperformed peers in the FMCG sector. On the contrary, Colgate Palmolive and Britannia Industries are strong in single product category i.e. tooth pastes and Biscuits. In addition companies have been successful in reviving their presence in the semi-urban and rural markets.

Major investments Some of the major investments in the industry are: Chennai-based FMCG company CavinKare is planning to invest around US$ 109.50 million over the next two years in various expansion plans, including a greenfield facility for namkeen at Thane, cool drinks in the North and others.

Nestle, the fast moving consumer goods major, plans to invest US$ 50.49 million to set up its first research and development (R&D) centre in India at Manesar in adjoining Gurgaon district. The facility will be made operational by July 2012. Packaged consumer goods company GlaxoSmithKline Consumer Healthcare (GSKCH) plans to invest over US$ 64.87 million on repositioning milk food drink Horlicks as the companys umbrella brand. FieldFresh Foods , joint venture of the Bharti Enterprises and Del Monte Pacific Ltd, has inaugurated their Research and Development and manufacturing facility in Hosur, Tamil Nadu at an investment of US$ 25.93 million.

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Agri solutions provider Buhler India plans to invest US$ 22.55 million in an integrated manufacturing unit and other expansion projects in the next four years, in line with its plans to achieve US$ 225.49 million turnover by 2014. Soft drinks and snacks major Pepsico is planning to invest US$ 500 million in India in the next two years. Atlanta-based Coca Cola Company plans to invest up to US$ 120.75 million to set up a new bottling plant in Karnataka, India

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Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

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Firstcall India Equity Research: Email info@firstcallindia.com C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods B. Prathap IT D. Ashakirankumar Automobile A. Rajesh Babu FMCG H.Lavanya Oil & Gas A.Prathibha Diversified Dheeraj Bhatia Diversified Manoj kotian Diversified Nimesh Gada Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPOs, QIPs, F.P.Os,Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai 400 071 Tel. : 022-2527 2510/2527 6077/25276089 Telefax : 022-25276089 E-mail: info@firstcallindiaequity.com www.firstcallindiaequity.com

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