Stock Analyzer Nestle India Limited

FMCG – Large
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NESTLE LTD-Dly .08/02/07-22/01/08 B-500790 Price 1600 1500 1400 1300 1200 1100 1000 Volume 900 1000000 750000 500000 250000 07 M A M J J A S O N D 08 V 82387 TREND T 22/01/08 O 1349 H 1370 L 1200 C 1313 V 1048

January 22,2008

CMP - Rs. 1313, 12M Target Price – Rs. 1575
Buy at CMP and add if falls to the Rs.1215-1250 band Health bhi , Wealth bhi
Background Nestle India Limited (NIL) is a subsidiary of Nestle S.A of Switzerland and manufactures products under four segments - Prepared Dishes (20% of sales), Milk Products and Nutrition (44% of sales), Beverages (21% of sales) and Chocolates and Confectionary (15% of sales). NIL is manufacturing internationally famous brand names such as NESCAFÉ, MAGGI, MILKYBAR, MILO, KIT KAT, BAR-ONE, MILKMAID and NESTEA. Triggers We believe that NIL is poised to grow in the coming years at a robust pace with its attractive product categories (prepared dishes, milk products beverages and confectionaries) and strong stable of brands like Maggi, Nescafe and Nestle, which has limited competition and has higher pricing power. Leveraging its access to world class technology available from Nestle group NIL has been able to come out with renovative as well innovative products This not only addresses the nutrition and health attributes but at the same time has helped it to widen its product range in the premium range which would help it to improve margins. We expect the operating margins to improve by 100 bps in CY08 and 60 bps in CY09.

Stock Details BSE Code NSE Code Bloomberg Price (Rs.) -22/01/2008 Equity Capital Face Value (Rs.) Eq.Shares O/S Market cap Book Value Avg.Volumes (3mths) 52 Week H/L

500790 NESTLE NEST IN 1310 96.42 10.00 9.64 12630.46 40.33 50865 1662/876

Instant Food/meals is one of the fastest growing segments with the changing lifestyles and growing number of nuclear families and we believe that NIL is best suited to reap the benefits of consumerism. The domestic business has been growing in double digits for the past nine quarters, which actually reflects the buoyant growth expected in the coming future. Financials at a Glance In Cr. Net Sales PBDIT PAT Equity EPS CY06 2816.1 559.1 326.9 96.4 32.7 CY07E 3337.1 669.4 414.6 96.4 43.0 CY08E 3926.5 823.9 540.7 96.4 56.1 CY09E 4501.5 969.3 651.0 96.4 67.5

Shareholding Pattern
(As on 30 Sept. 2007) Promoters Institutions Foreign Public & Others

In %

61.9 11.5 8.3 18.32

Valuations & Recommendation We believe that as Nestle leverages upon favorable demand conditions and given its aggressive strategies, NIL promises high earnings visibility. We expect the bottomline to grow by 30% in CY08 and 20% in CY09. We believe with strong parentage, healthy free cash flows and dominant market position, NIL would continue to enjoy premium valuations compared to its peers in the FMCG sector. At the current market price of Rs.1313, the stock is trading at a price/earnings ratio (PER) of 23.4x CY2008E EPS of Rs.56 and 19.4x CY2009E EPS of Rs.67.5.We recommend buy on Nestle at CMP and add if falls to Rs.12151250 band with a price target of Rs.1575 which is a 20% upside from the current levels.

Retail Research

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Milkybar. In Cr Milk Products Beverages Prepared dishes Chocolates Strengths Brands Everyday. KIT KAT. BAR-ONE. Internationally famous brand names such as NESCAFÉ. which has helped it grow exponentially in the processed food space.55 • • • • Access to Nestlé's Proprietary technology brands and expertise Strong & well differentiated brands with leading market shares Ongoing product innovation and renovation to convert consumer insights Distribution structure that allows wide reach and coverage in the target markets Threats • • Competitive environment with diverse players Rising prices of commodities SWOT ANALYSIS Weakness Opportunities • Ability to pass through cost increases in price points SKU • • Potential for expansion in the smaller towns and other geographies Development of modern retail formats Investment Rationale Robust growth across segments… NIL has witnessed strong bounce back across all segments owing to favourable demographics. NESTLÉ Fresh 'n' Natural Dahi and NESTLÉ Jeera Raita. Eclairs. Nestle dahi. Milo Maggi Kit Kat. Retail Research 2 of 2 . Brands like Maggi and Nescafe has become so common in Indian households that it has become more of a generic term and this has helped NIL to explore new product categories with less spending on the brand building exercise. which has received better acceptability in the rural areas. Nesvita (Probiotic dahi) Nescafe.21 582. Polo CY06 1285. MILKMAID and NESTEA are being manufactured by NIL and in recent years it has also introduced products of daily consumption and use such as NESTLÉ Milk.Prepared Dishes (20% of sales).Company Background: Nestle is a subsidiary of Nestle S.15 501.A of Switzerland and manufactures products under four segments . rising consumerism as well as rising disposable income.82 598.73 384. Nestea.70 CY05 1175. Milkmaid. Just by tweaking slightly its products (for eg .01 455.66 604. NIL has started marketing its products in small SKU. Beverages (21% of sales) and Chocolates and Confectionary (15% of sales). Sunrise. Milk Products and Nutrition (44% of sales).from Maggi Vegetable Noodles to Maggi Dal Atta Noodles) NIL had been able to increase its penetration not only in the urban areas but also to the rural segment. NIL has adopted a consumer centric approach. NESTLÉ SLIM Milk. MILO. MILKYBAR. MAGGI.

which is congruent to our belief that prepared dishes is now emerging as a high growth segment. Nestle Kitkat. Top Advertisers in Instant Foods / Meal Sector Nestle India Hindustan Unilever Ltd ITC Ltd Hatsun Agro Product Ltd Asian Thai Foods Pvt Ltd Indo Nissin Foods Ltd Krishna Traders Capital Foods MTR Foods Abha Group % Share 45 25 20 3 2 2 1 1 1 0. which has a market share of around 20%.5% and continues to lead the market for instant noodles. Aggressive launches coupled with higher advertising has lead to higher volumes for NIL. soups. the Rs 300-crore ready-to-drink (RTD) flavoured milk market has started catching Retail Research 3 of 3 . According to recent research reports. There were 16 new brands under the “Instant Foods/Meals” sector on the electronic media during January – August 2007 and 3 out of ten brands belonged to Nestle India. sauces and ketchups. The chocolate market is valued at Rs. the Maggi brand is witnessing robust performance with a market share of 53. The television advertising of instant food/meals has grown by 19% during January – August 2007 compared to the same period in 2006. Instant Food/meals is one of the fastest growing segments with the changing lifestyles and growing number of working population.1 Source: TAM Media. chocolate consumption is expected to increase at the rate of 25% in India and Nestle being one the leading players is expected to benefit from it. HDFC Research The segment has witnessed aggressive launches and new entrants in the recent months. HDFC Research Domestic demand for chocolates is being driven by the burgeoning taste for chocolate in India backed by the changing demographics and rising income of the young population. and Nestle Milkybar continues to grow well. Expected Growth in the Working Population Source: RIL Presentation. Nestle is not only launching new products in this category but is also making an attempt to improve the visibility of its products.In the Prepared Dishes and cooking Aids category. With consumers slowly but surely moving away from carbonated soft drinks to healthier options.1250 cr and the category is largely consumed in urban areas with a 70% skew to urban markets and a 30% to rural markets. Cadburys has a market share of around 70% followed by Nestle. NIL commands a leadership position in the chocolate wafers category and brands like Nestle Munch. We believe with a new sense of aggression.

up. This change has made everyone. It has also undertaken capacity expansion at its existing manufacturing facilities in Moga. It has plans to take chilled dairy products to cities other than Delhi. Shift in consumer preference towards healthier alternatives is changing the composition of the food & beverages industry and that is making milk-based beverages carve a niche for itself. and has launched it in a few south Indian markets. Leveraging its access to world class technology available from Nestle group. NIL had realigned its internal structures with an objective to make it a multifocal Company with category specific business units and processes to further strengthen the brands. NIL has been able to come out with renovative as well innovative products which not only Retail Research 4 of 4 . We believe Nestle’s expertise in milk products will help it to carve out a niche in the flavored milk segment also. Bangalore. Haryana. we’re a market leader in three out of the four BRIC (Brazil. Kolkata.” This gives a clear understanding that going ahead Nestle India could witness higher activities relating to product launches and promotional activities. During CY05.Nestlé S. Nestle India has just extended its Milkmaid brand into milkshakesMilkmaid Funshakes. The overall market for flavoured milk in India is estimated to have grown 27 per cent in value terms in 2004-05. China) countries. India. Punjab and Samalkha. It is expected that it will go national in the next three to four months.A. Innovation and renovation leading to better pricing capabilities… NIL has continuously been coming up with new products in order to cater to a wider range of consumers. Mumbai. from global milk beverage biggies such as Hershey and Nestle India to Indian dairy majors such as Gujarat Cooperative Milk Marketing Federation (GCMMF) and Mother Dairy to go on a launch overdrive. Chief Financial Officer reflects optimism about emerging markets “The first priority is the developing countries. Russia. That’s obviously where a lot of the future growth is going and is high on the agenda for future growth there. Nestle India has 30% of the chilled dairy market in the six cities and is planning to take it to 40% within a year. Chennai and Hyderabad. Nestle India is planning to bring in products from its international portfolio and modifying it to suit the Indian taste buds. Sales growth in the last ten quarters 1000 900 800 700 600 500 400 300 200 100 0 200506 200509 200512 200603 200606 200609 200612 200703 200706 200709 Recent statements by Paul Polman . Since then NIL has been focusing on its sales and distribution channels so as to make them more efficient so that they can effectively address the emerging channel opportunities and formats which are expected to contribute to the accelerating growth in the coming years.

We believe all these initiatives are expected to propel growth in the coming years. NIL launched a new innovative concept. the overall performance of Soups improved significantly during 2006. NIL pays 3% of the revenue as royalty to its parent. NIL has established an efficient Milk collection system by installing chilling centers and collection points. under the brand MAGGI Healthy Soups Sanjeevani. To meet the ever-increasing demand for milk. Lean Cuisine. NIL has seven milk processing units in India and it collects more than 12 lac kg of milk from the state of Punjab and Haryana. MAGGI Vegetable Atta Noodles that was developed based on consumer needs and evolving trends towards more whole grain based products. which had been addressing to the tastes and preferences of most of its consumers. In line with its strategy to focus on consumer needs. Stouffer's Baby Food Nestle NAN Beverages Nesquik. a new range of Instant Soups were launched during early 2007. which have been specially targeted at the urban health conscious consumer. Nestle Fresh N Slim Dahi and Nestle Kit Kat Life. Potential launches by Nestle India from its product basket Category Brands Milk Products Carnation Prepared dishes Buitoni.It has recently launched Cerevita brand of breakfast cereals . Martial Rolland who has been deputed by the parent. which helps it to procure milk in a cost efficient way. Hot Pockets. NIL has been able to get acceptability in the urban as well as the rural markets. Milk a key ingredient for Nestle (constitutes around 47% of the total raw material cost) and to procure plentiful supply of fresh and high quality milk is a key challenge for NIL. Post CY05. With the launch of new MAGGI Healthy Soups. All these variants are slightly altered products from the base products but had been priced at a premium (25-50%) to the existing ones. With this advantage. Earlier its products were not able to tap a large section of the consumer who regarded its products as unhealthy (particularly Maggi Noodles due to the high maida content) but with its increased focus towards health and wellness platform (with the introduction of whole grain based products). Existing brand Kit Kat Nestle Dahi Everyday Dairy Whitener Maggie Noodles Nestle Milk Maggi Health Soups Price per Unit 5 12 47 10 30 25 Vale Added Variants Price per Unit Differential % Kit Kat Life 7 40% Nestle Slim Dahi 15 25% Everyday Daily Slim Whitener 60 28% Maggi Dal Atta Noodles 14 40% Nestle Slim Milk 37 23% Maggi Health Soups -Sanjivani 26 4% Source: HDFC Securities Research Access to Nestlé’s Technology and strong sourcing relationship NIL agreement with the Nestle group enables it to access the most advanced technology in the food and beverage segment. NIL has continuously come out with new variants across all the segments. Further NIL introduced Nestle Everyday Slim. Edy’s Source: HDFC Securities Research Strong sourcing relationship to help in easy procurement of milk One of the most important factors to be successful in the agro processing industry is to develop strong sourcing relationships for key ingredients. The current CEO of NIL is Mr. This portfolio was further supplemented by Maggi Rice Mania and Maggi Dal Atta Noodles. Retail Research 5 of 5 . NIL had been able to launch a host of products catering to wider range of tastes and preferences. Nespresso Ice Cream Dreyer's.addresses the nutrition and health attributes (“taste bhi health bhi”) but at the same time has led to widen its products in the premium range leading to high and stable margins.

Despite the fact that rises in prices of dairy products may not have much bearing on the rising inflation rate (combined weightage of 0. Annual Report.50 for a litre of buffalo milk as against Rs 19-20 a litre in July. Players like Mother Dairy India Ltd and Gujarat Cooperative Milk Marketing Federation Ltd (GCMMF) have hiked prices of milk sold in New Delhi region by Re 1 per litre. Retail Research 6 of 6 . milk. the ban on SMP clearly indicates that government would continue to interfere when it comes to tackling price rise of politically sensitive commodities. green coffee and sugar has gone up in the recent past. the government with a view to curb the increase in the prices imposed a ban on the export of skimmed milk powder (SMP). milk prices had started gaining again.98% in Mar 2002 to 58. Prices of key input prices such as wheat. a traditionally lean season in milk production. 210 205 200 195 190 185 180 175 170 165 160 300 250 200 150 100 50 0 May-04 May-05 May-06 May-07 Mar-04 Mar-05 Mar-06 Sep-04 Sep-05 Sep-06 Nov-04 Nov-05 Nov-06 Mar-07 Jul-04 Jul-05 Jul-06 Jan-04 Jan-05 Jan-06 Jan-07 Monthly Wholesale Price Index for Milk Monthly Wholesale Price Index of SMP Raw Material Break up – CY06 Monthly Wholesale Price Index for Sugar 200 180 160 140 120 100 80 60 40 20 0 May-04 May-05 May-06 May-07 Mar-04 Mar-05 Mar-06 Sep-04 Sep-05 Sep-06 Nov-04 Nov-05 Nov-06 Mar-07 Jul-04 Jul-05 Jan-04 Jan-05 Jan-06 Jul-06 Jan-07 Wheat Flour 8% Skimmed Milk Pow der 9% Vegetable Oils 8% Others 16% Fresh Milk & Milk Concentrate 38% Sugar 8% Green Coffee 13% Source: Min.We believe with milk being a sensitive commodity.85% in Dec 2003. Nestle HDFC Sec.3% in Sept 2002 to 61. & Ind. Recently. Concerns Raw Material Prices The unprecedented rise in the raw material cost is a concern for NIL. NIL has not only undertaken price hike across some of its products but has also introduced value added products pricing them at a premium.68% of dairy products in the WPI). of Comm. government interference would continue. when the milk prices had started soaring during summer.Research Buyback by Parent Nestle’s Swiss-based parent raised its holding in NIL from 53.. To combat the adverse impact of the rising RM cost. As a result the prices of milk had come down and private dairies in the North were paying Rs 15-15. A 100% buyout/delisting of shares is a distinct possibility and this could act as a support to the stock price. With the ban lapsing.

Competition getting tougher We believe that the growth potential of the food processing industry would attract domestic as well as multinational players.56 and 19. increasing number of nuclear families. changing consumer tastes.3 95. the stock is trading at a price/earnings ratio (PER) of 23. etc and a host of local manufacturers offering competition with their established brands on national level. HLL. Retail Research 7 of 7 . Wrigley.4x CY2008E EPS of Rs. a 24% growth in EBITDA to Rs.19 617. Britannia.4 4.7 88.8% 9MTHS CY06 2175.3 436. Mars.99 320. Gross Sales Excise Duty Net Sales Other Income Total Income Total Expenditure PBIDT Interest PBDT Depreciation Tax Deferred Tax Reported Profit After Tax EPS Equity PBIDTM(%) RM Cost as a % of Sales 9MTHS CY07 2712.2 2696.We recommend buy on Nestle at CMP and add if falls to Rs.57 130.18 144. Hershey. NIL with better operational efficiencies and improved pricing power had been able to overcome the effect of rising raw material costs.54 2079.6 0.1313.6% 46. NIL has shown double digit growth in the topline for the past 7 Quarters out of which the last three quarters had reported a robust growth of 20%+.5 2109.57 103.67.2 33.75. ITC. increasing disposable incomes would accelerate growth for NIL.2 96.87 2608. Pillsbury.71 21.4x CY2009E EPS of Rs.541cr and a PAT growth of 27% to Rs. Dabur. Category Milk Products Chocolate Baby Food Prepared Dishes Key Competitors for Nestle Competitors Amul.3 48.71 252. Bambino Source: HDFC Securities Research 9 Months Performance in CY07 NIL has reported a robust growth of 25% in Net Sales at R. Pepsi. The market is seeing players like Heinz.3 cr) the EBITDA margin has improved by 70 bps in the first 9 months of CY07.42 19.08 54. Britannia Cadbury. Perfetti Wockhardt HUL. We believe that the revenue growth is also sustainable as a huge rural market is still untapped as rural consumers start adapting to these products. Cadbury. In Cr. Nestle and Amul. Changing lifestyle. Parle. Conagra.42 20.3% 47.320cr.1575 which is a 20% upside from the current levels. At the current market price of Rs.76 29.2 96.5% YOY 25% 9% 25% 199% 28% 29% 41% 110% 24% 12% 11% 367% 27% 27% +70bps Valuation and Outlook With aggressive product launches.63 541. improved distribution reach favourable demand scenario we believe NIL is poised to grow at a rapid pace in the coming future.2712cr. Nissin.26 1672.5. After adjusting for the provisioning made in the first quarter of CY07 (Provision of Rs.9 2155. Smithkline Beecham.1215-1250 band with a price target of Rs.62 26. Hershey.66 436.08 0. ITC.

5 (189.8 276.1 CY07E 3488.0 18.9) (2277.6) 170.4 292.5) (700.0) (487.1) 405.4 416.9) (257.5 (165.3 (575.0 327.9) (192.5 (2135.6) 904.0 (438.6 CY06 2944.6 (160.6 (220.0 150.3) (233.0 658.1 20.0 602.0) (221.7 (195.4 617.6 1228.3 405.8 (64.8 76.5) 541.1) 609.5) (938.5 20.1) 2816.3 1118.1 20.0 (587.3 16.7) (820.2 CY07E 96.2 580.4 (174.5) 823.2 300.2) (138.0 3946.9 (0.4) 315.6) 559.6 2836.9 (151.4 552.0 666.5 150.9) (242.4) 628.Financials & Projections Profit & Loss A/c In Cr Gross Sales Less: Excise Duty Net Sales Other Income Total Income Raw Materials Employee costs Selling & distribution Manufacturing Exps Cost of sales PBIDT Interest PBDT Depreciation Profit before tax Provision for tax PAT Balance Sheet In Cr.5) (7.5 20.3 (599.0 4521.4 (61.5) 668.9) 540.2) 531.8) 761.0) (400.8 560.1) 480.8 30.4 33.1 713.4) 558.5 18.0 3357.0 Retail Research 8 of 8 .6 88.4 (0.0 (513.4 77.0 18.3 CY08E 96.0 18.7) (216.2) (2687.0 383.7) (7.8 127.0) (400.3) (3552.0 (366.8) 666.7 CY09E 4675. Equity capital Reserves Net worth Secured loans Total debt Capital employed Gross block Accumulated depreciation Net block Capital WIP Total fixed assets Investments Inventories Sundry debtors Cash & bank Loans & advances Sundry creditors Acceptances Provisions Working capital Capital deployed CY06 96.1 (0.0 77.5 30.6) 823.0) (400.1) 3926.3 66.8) 3337.5 (1866.8) 572.0 648.9) (7.2 (128.6 CY08E 4086.9 513.7 (1331.0 731.9 (59.7) 669.0 531.8 38.3 (516.9 16.1) (395.0) 4501.5 1178.9) (229.8) (7.1) (3122.2 1058.2) 651.1 81.3) 731.0 438.2 (253.3 18.5) 968.3 (545.1) (164.0) 603.2 30.3 (0.5 388.5) (220.2) 969.1 (1593.8) (590.1) 414.0 633.7 (78.2 55.5 CY09E 96.0) (266.6 18.3 160.

1) (268.5 12.Ratio Analysis Profitability Indicators (%) PBIDT (ex. other income) PAT Growth Ratios (%) Net Sales PAT Return on (%) Net worth (post tax) Capital employed (pre tax) Per Share EPS Cash Flow Statement In Cr Operating activities Investing activities Financing activities CY06 432. and buy and sell securities referred to herein.2 (153.1 18.4 Mohini Sinha (mohini.8) CY07E 466.4 CY08E 20.4 CY06 19.7 CY09E 21.5 13.8 121. C. We may have from time to time positions or options on.4 11.5 84.1) CY08E 600.com Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation.1 114.1 67. but not limited to. including.6 17.2) (585.0 (123.hdfcsec. any company mentioned in this document.6 123. 1st Floor.7 43.9) 32. Senapati Bapat Marg.6 91. The information contained herein is from sources believed reliable.1 14.0 56.1 30. Lower Parel.5) (405. This report is intended for Retail Clients only and not for any other category of clients. or other services for.3 (350. It should not be considered to be taken as an offer to sell or a solicitation to buy any security.9 93.5) CY09E 713.8) (308. Institutional Clients Retail Research 9 of 9 .sinha@hdfcsec. Kamala Mills Compound. We do not represent that it is accurate or complete and it should not be relied upon as such. Trade World.4 95.1 CY07E 19.1 11. Mumbai 400 013 Phone: (022) 66611700 Fax: (022) 2496 5066 Website: www.5 31.com) RETAIL RESEARCH Tel: (022) 6661 1700 Fax: (022) 2496 5066 Corporate Office HDFC Securities Ltd. Wing. This document is not to be reported or copied or made available to others.7 11.9 114. We may from time to time solicit from.com Email: hdfcsecretailresearch@hdfcsec. or perform investment banking.4 20.4 14.3 (242.

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