Financials/Valu CY15 CY16 CY17E CY18E FY19E

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1 14-Nov-17 INDUSTRY - Con. Staples BLOOMBERG - NEST IN BSE Code NSE Code - NESTLEIND NIFTY Company Data CMP 7715 Target Price 845 Previous Target Price 75 Upside 1% 52wk Range H/L Mkt Capital (Rs Cr) Av. Volume (,) RoE & ROCE 7.% 6.% 5.% 4.% 3.% 1.%.% Shareholding patterns % 8/575 74,381 Key Highlights of the Report: NESTLE has posted result better than our expectations, sales grew by 3% YoY while PAT has shown a handsome growth of 23% YoY. Financials/Valu CY15 CY16 CY17E CY18E FY19E Net ation Sales 8,175 9,224 1,16 11,178 12,851 EBITDA 1,555 1,87 2,85 2,333 2,772 EBIT 1,28 1,453 1,74 1,979 2,419 PAT ,18 1,353 1,663 3QCY17 2QCY17 1QCY17 EPS (Rs) Promoters EPS growth (%) -52% 64% 27% 15% 23% Public ROE (%) 32% 31% 34% 36% 39% Total... ROCE (%) 43% 48% 5% 52% 57% BV Stock Performance % P/B (X) Mn 3Mn 1Yr P/E (x) Absolute Rel.to Nifty (.1) Recent development and launches: The company has launched Maggi Nutri-licious Noodles, Milkybar and Kit Kat dessert delight in this quarter. 125 NESTLEIND NIFTY NESTLE SA has set up Nestle Food Safety Institute (NFSI) in India in 12 Q3CY % 47.7% 32.3% 31.4% ROE ROCE 5.3% 51.7% 34.4% 35.7% 56.6% 39.2% CY15 CY16 CY17E CY18E FY19E Domestic revenue grew by 3.7% (on comparable basis at 9.1%) led by increase in volume supported by new launches and better realization. Exports has shown recovery and grew by 2.6% to Rs 16 cr as compared to decline of 12% in Q2CY17. EBITDA margin improved by 334 bps YoY and 465 bps QoQ led by lower other expenses and GST related changes. Company s thrust on launching new products in each category, focus on cost efficiency with rationalization of process and benefits driven by urban demand recovery makes us positive on NESTLE. We value it at 49 times of FY19 s expected EPS and maintain BUY with the target price of Rs 845. It has tied up with e-commerce player Amazon for the launch of its new range of popular Maggi noodles. Nestle India has launched new range of Noodles Maggi Masala in India in Q2CY17. The new range of MAGGI noodles includes four new flavors. The Company has introduced Milo Ready to drink the sports partner for kids in 1QCY17. RAJEEV ANAND rajeev.anand@narnolia.com

2 Quarterly Performance Financials 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 YoY % QoQ% CY15 CY16 YoY % Net Sales 2,43 2,286 2,592 2,485 2,514 3% 1% 8,175 9,224 13% Other Income % 4% % COGS ,94 1,79 1,85 1% 1% 3,469 3,88 12% Net Provi. For Contin (3) () -11% -97% Employee Cost % 4% 913 1,73 18% Other Expenses % -6% 2,147 2,41 12% EBITDA % 26% 1,555 1,87 16% Depreciation % 1% % Interest (22) (23) (23) (23) 4% % % PBT % 31% 814 1,44 77% Tax % 33% % PAT % 3% % Better revenue growth led by better domestic business performance NESTLE s revenue for this quarter grew by 3% YoY to Rs 2514 cr led by better domestic revenue growth. Domestic revenue grew by 3.7% (on comparable basis at 9.1%) to Rs 2341 cr led by increase in volume supported by new launches and better realization. Exports has shown recovery and grew by 2.6% to Rs 16 cr as compared to decline of 12% in Q2CY17. EBITDA margin improved by 334 bps YoY and 465 bps QoQ led by lower other expenses and GST related changes.other expenses declined by 261 bps YoY to 22.9%. The company has reported PAT growth of 23% YoY to Rs 343 cr while PAT margin has improved by 219 bps YoY to 13.6%. Provisioning for Taxes has increased by 155 bps YoY to 33.7% in Q3CY17. NESTLE's Sales(in cr) PAT(in cr) OPM NPM % 15.% 1.% 5.%.% -5.% 21.8% 12.3% 19.2% -3.3% 15.3% 18.% 9.3% 7.1% 21.7% 2.6%19.9% 18.6% 17.6% 23.2% 13.6% 12.1% 1.4% 11.5% 11.8% 1.6% 7.2%

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 4 products in last 1-2 year. 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. 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. Prepared Dishes(includes Maggi) 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% 4% 4% Vol. Growth YoY 73% -59% % 6% 4% 2% % -2% -4% -6% -8% View & Valuation NESTLE has posted result better than our expectations, sales grew by 3% YoY while PAT has shown a handsome growth of 23%. Domestic revenue grew by 3.7% (on comparable basis at 9.1%) led by increase in volume supported by new launches and better realization. The company has launched more than 4 products in last 1-2 year. Going forward, we expect it to continue as its parent has huge product portfolio. Secondly, company s most of the sales come from urban markets, approx. 75%, hence any recovery in urban demand will impact it positively. Maggi is also doing well and consolidating its market share. New product launches will reduce company s overdependence on single product thus ensure stability of cash flows. Company s thrust on launching new products in each category, focus on cost efficiency with rationalization of process and benefits driven by urban demand recovery makes us positive on NESTLE. We value it at 49 times of FY19 s expected EPS and maintain BUY with the revised target price of Rs 845.

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 1,16 11,178 12,851 ROE 31% 34% 36% 39% Change (%) 13% 9% 12% 15% ROCE 48% 5% 52% 57% Other Operating Income Asset Turnover EBITDA 1,87 2,85 2,333 2,772 Debtor Days Change (%) 16% 15% 12% 19% Inventory Days Margin (%) 2% 21% 21% 22% Payable Days Dep & Amortization Interest Coverage EBIT 1,453 1,74 1,979 2,419 P/E Interest & other finance cost Price / Book Value Other Income EV/EBITDA EBT 1,442 1,836 2,114 2,599 FCF per Share Exceptional Item (31) Dividend Yield.9% 1.% 1.1% 1.4% Tax Minority Int & P/L share of Ass Assumptions Reported PAT 927 1,18 1,353 1,663 Y/E March CY16 CY17E CY18E FY19E Adjusted PAT 946 1,18 1,353 1,663 Volume growth 36% 8% 8% 1% Change (%) 64% 27% 15% 23% Pricing growth -11% -1% 5% 5% Margin(%) 1% 12% 12% 13% 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 1,836 2,114 2,599 Reserves 2,917 3,332 3,697 4,145 (inc)/dec in Working Capital Networth 3,14 3,428 3,793 4,241 Non Cash Op Exp Debt Interest Paid (+) Other Non Current Liab Tax Paid (53) (656) (761) (936) Total Capital Employed 3,47 3,461 3,826 4,274 others (148) Net Fixed Assets (incl CWIP) 2,918 2,94 2,892 2,881 CF from Op. Activities 1,466 1,661 1,768 2,15 Non Current Investments (inc)/dec in FA & CWIP (113) (331) (342) (342) Other Non Current Assets Free Cashflow 1,353 1,33 1,425 1,762 Non Current Assets 3,527 3,646 3,784 3,924 (Pur)/Sale of Investment - (433) (45) (45) Inventory 943 1,24 1,143 1,314 others (14) Debtors CF from Inv. Activities (127) (764) (792) (792) Cash & Bank 88 1,168 1,49 1,761 inc/(dec) in NW Other Current Assets inc/(dec) in Debt () Current Assets 3,279 3,964 4,647 5,51 Interest Paid (4) (91) (91) (91) Creditors ,113 Dividend Paid (inc tax) (679) (767) (894) (1,12) Provisions others Other Current Liabilities CF from Fin. Activities (667) (69) (735) (961) Curr Liabilities 1,633 1,773 1,979 2,275 Inc(Dec) in Cash Net Current Assets 1,646 2,191 2,668 3,227 Add: Opening Balance 1, ,168 1,49 Total Assets 6,86 7,61 8,431 9,425 Closing Balance 2,144 1,169 1,49 1,761

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