Narnolia Securities Ltd. RAJEEV ANAND 28-Jul-17

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1 28-Jul-17 INDUSTRY - Con. Staples BSE Code NSE Code - NESTLEIND NIFTY Company Data CMP 6789 Target Price 75 Previous Target Price 792 Upside 1 52wk Range H/L Mkt Capital (Rs Cr) Av. Volume (,) RoE & ROCE Shareholding patterns % 739/571 65,46 34 Key Highlights of the Report: The company has reported numbers inline to our estimates for Q2CY17, sales grew by 7% YoY whereas PAT grew by 1 YoY. Financials/Valu CY15 CY16 CY17E CY18E FY19E Net ation Sales 8,175 9,224 1,221 11,455 13,4 EBITDA 1,555 1,87 1,897 1,927 2,215 EBIT 1,28 1,453 1,554 1,573 1,862 PAT ,13 1,137 1,349 2QCY17 1QCY17 4QCY16 EPS (Rs) Promoters EPS growth (%) -52% 64% 19% 3% 19% Public ROE (%) 32% 31% 32% 31% 33% Total ROCE (%) 43% 48% 45% 42% 45% BV Stock Performance % P/B (X) Mn 3Mn 1Yr P/E (x) Absolute (4.5) Rel.to Nifty (2.1) (1.6) (2.5) Recent development and launches: % 48% ROE 45% 32% 31% 32% ROCE 42% 31% 45% 33% CY15 CY16 CY17E CY18E FY19E 12 NESTLEIND NIFTY Domestic revenue grew by 8.8% led by increase in volume supported by new launches, revival of Maggie and better realization. Exports declined by 12% YoY to Rs 148 cr due to lower sales of Milk & Nutrition products to Bangladesh and Middle East. Gross margin declined by 244 bps YoY to 56.6% mainly due to higher prices of milk and its derivatives. Considering slow traction in the new product launches we have reduced our target from Rs 792 to Rs 75 though we still have a positive view on the company and expect traction from new product to catch up. We maintain BUY rating on NESTLEIND. Nestle India has launched new range of Noodles Maggi Masala in India. The new range of MAGGI noodles includes four new flavors - Amritsari Achari, Mumbaiya Chatak, Super Chennai and Bengali Jhaal. In this quarter, Nestle India tied up with Google and Paytm for promotion to create strong bonding with consumers which may boost volumes going forward. The Company has introduced Milo Ready to drink the sports partner for kids in 1QCY17. NESTLE India extends NESTLE a+ GREKYO range with the launches of Blueberry Greek Yoghurt and Greek Style Curd. RAJEEV ANAND rajeev.anand@narnolia.com

2 Quarterly Performance Financials 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 2QCY16 QoQ% CY15 CY16 YoY % Net Sales 2,317 2,363 2,286 2,592 2,485 7% -4% 8,175 9,224 13% Other Income % -1% % COGS ,94 1,79 14% -1% 3,469 3,88 12% Net Provi. For Contin (3) -127% -131% Employee Cost % 3% 913 1,73 18% Other Expenses % -2% 2,147 2,41 12% EBITDA % -11% 1,555 1,87 16% Depreciation % -1% % Interest (22) (23) (23) 4% 1% % PBT % -12% 814 1,44 77% Tax % -8% % PAT % % Better revenue growth led by better domestic business performance Gross margin declined by 244 bps YoY mainly due to higher milk and derivatives prices. NESTLE s sales for this quarter grew by 7% YoY to Rs 2485 cr led by 8.8% growth in domestic business revenue. Domestic revenue grew by 8.8%YoY to Rs 2321 cr led by increase in volume supported by new launches, better performance by Maggie and better realization. Gross margin declined by 244 bps YoY to 56.6% mainly due to higher prices of milk and its derivatives. Management did not pass on increase in input prices fully to consumers. EBITDA margin declined by 197 bps YoY to 18.6% due to 244 bps,41 bps and 39 bps YoY increase in COGS, employee expenses and excise duty respectively. Tax Rate for this quarter increased by 289 bps YoY due to the end of first 5 years of Income Tax Holidays of 1 of the profits of Samalkha factory unit-2. PAT margin improved by 23 bps YoY to 1.6% due to presence of exceptional cost of Rs32 cr in previous quarter. PAT grew by 1 YoY to Rs 263 cr from Rs 24 cr. Sales(in cr) PAT(in cr) OPM NPM % 21.7% 2.6% 19.2% % % 17.6% 15.3% 12.3% 12.1% 1.4% 11.4% 11.8% 1.6% 9.3% 7.1% 7.2% -3.3%

3 Investment Arguments: New product launches, the key of future growth: After Maggie fiasco, company s new management has become more aggressive in launching new products. The company has launched more than 25 products in last few quarters. NESTLE has strong backing of its parent with more than 2 products globally.going forward, it has plans to launch more new products from its parent s global product portfolio. New product launches will improve company s volume going forward. Historically NESTLE has strong pricing power: As in most the FMCG categories input prices have bottomed out and have started moving up. Hence going forward we expect growth for FMCG will be pricing led. NESTLE has strong premium product portfolio and strong pricing power. Urban demand recovery led growth going forward: For last four years urban demand is struggling due to higher inflation and lower economic activities which is one of the causes of company s dismal performance. As NESTLE s most of the sales comes from urban areas, approx. 75%, hence any recovery in urban demand will be huge positive for the company. We expect better demand scenario for urban market going ahead led by declining inflation and interest rate scenario. Hence we have positive view on NESTLE. Smart bounce back by Maggie shows strong brand value: Nestle re-launched Maggie on 9 Nov., 215 and within 53 days of re-launch, it regained market share of 33% which shows strong brand power. Presently, Maggie s market share has reached to 6 versus peak market share of 75% which is commendable. It shows new management s aggression and focus towards NESTLE s future growth. Going forward we expect brand Maggie to consolidate further with more market share gain. NESTLE didn t take price hike in CY16, so expect hike in CY17 Prepared Dishes(includes Maggie) Volume and growth 35% 3 25% 2 15% 1 5% -5% -1-15% 8% 5% Overall Realization growth YoY 13% 11% 9% 7% 2% 31% -11% Prepared Dishes Vol.(in MT) 25% 3 22% 13% 8% Vol. Growth YoY 73% 4% 4% % View & Valuation NESTLE has reported numbers inline to our estimates for Q2CY17, sales grew by 7% YoY whereas PAT grew by 1 YoY. The company has launched more than 25 products in last few quarters. Going forward, it has plans to launch more new products from its parent s global product portfolio. Secondly, company s most of the sales come from urban areas, approx. 75%, hence any recovery in urban demand will be huge positive for the company. Presently, regaining of market share by Maggi to 6 versus peak market share of 75% is the key positive but traction from new product launches have not been very strong. Considering slow traction in the new product launches we have reduced our target from Rs 792 to Rs 75 though we still have a positive view on the company and expect traction from new product to catch up. We maintain BUY rating on NESTLEIND.

4 Financials Snap Shot Income Statement Rs in Crores Key Ratios Y/E March CY16 CY17E CY18E CY19E Y/E March CY16 CY17E CY18E CY19E Revenue from Operation 9,224 1,221 11,455 13,4 ROE 31% 32% 31% 33% Change (%) 13% 11% 12% 14% ROCE 48% 45% 42% 45% Other Operating Income Asset Turnover EBITDA 1,87 1,897 1,927 2,215 Debtor Days Change (%) 16% 5% 2% 15% Inventory Days Margin (%) 2 19% 17% 17% Payable Days Dep & Amortization Interest Coverage EBIT 1,453 1,554 1,573 1,862 P/E Interest & other finance cost Price / Book Value Other Income EV/EBITDA EBT 1,442 1,715 1,769 2,99 FCF per Share Exceptional Item (31) Dividend Yield.9% % 1.3% Tax Minority Int & P/L share of Ass Assumptions Reported PAT 927 1,13 1,137 1,349 Y/E March CY16 CY17E CY18E FY19E Adjusted PAT 946 1,13 1,137 1,349 Volume growth 36% 8% 6% 9% Change (%) 4% 17% 3% 19% Pricing growth -11% -1% 6% 5% Margin(%) 1 11% 1 1 Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores Y/E March CY16 CY17E CY18E CY19E Y/E March CY16 CY17E CY18E CY19E Share Capital PBT 1,442 1,715 1,769 2,99 Reserves 2,917 3,311 3,617 3,981 (inc)/dec in Working Capital Networth 3,14 3,47 3,714 4,77 Non Cash Op Exp Debt Interest Paid (+) Other Non Current Liab Tax Paid (53) (613) (632) (75) Total Capital Employed 3,47 3,44 3,747 4,11 others (148) Net Fixed Assets (incl CWIP) 2,918 2,94 2,892 2,881 CF from Op. Activities 1,466 1,48 1,528 1,741 Non Current Investments (inc)/dec in FA & CWIP (113) (329) (342) (342) Other Non Current Assets Free Cashflow 1,353 1,151 1,186 1,399 Non Current Assets 3,527 3,646 3,784 3,924 (Pur)/Sale of Investment - (433) (45) (45) Inventory 943 1,45 1,171 1,33 others (14) Debtors CF from Inv. Activities (127) (762) (792) (792) Cash & Bank 88 1,159 1,345 1,65 inc/(dec) in NW Other Current Assets inc/(dec) in Debt () Current Assets 3,279 3,979 4,616 5,365 Interest Paid (4) (26) (26) (26) Creditors ,127 Dividend Paid (inc tax) (679) (71) (736) (89) Provisions others Other Current Liabilities CF from Fin. Activities (667) (487) (512) (667) Curr Liabilities 1,633 1,89 2,28 2,32 Inc(Dec) in Cash Net Current Assets 1,646 2,17 2,589 3,63 Add: Opening Balance 1, ,159 1,345 Total Assets 6,86 7,626 8,4 9,289 Closing Balance 2,144 1,111 1,383 1,628

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