Nestlé India Outlook Hazy; Valuations Prohibitive

Nestlé India Outlook Hazy; Valuations Prohibitive Nestlé India s net sales, EBITDA and net profit surged by 35% yoy, 67% yoy & 116% yoy to Rs23.5bn, Rs4.5bn & Rs2.7bn, respectively in 3QCY16. This growth is largely attributable to lower base effect due to ban on Maggi in the previous year, while growth excluding Maggi is likely to be in lower single digit. While we expect Nestlé to see 14.9% & 17.8% CAGR in revenue and earnings through CY16-18E, the valuations at 41.7x CY18E earnings are prohibitive, in our view. As we believe that there are better opportunities in the FMCG space at inexpensive valuations, we maintain our recommendation on the stock with an upwardly revised Target Price of Rs5,974 (from Rs5,823 earlier). CMP* (Rs) 6,786 Market Cap. (Rs bn) 654 Free Float (%) 37.3 Shares O/S (mn) 96 Share price (%) 1 mth 3 mth 12 mth Absolute performance 6.8 (1.2) 11.3 Relative to Nifty 6.6 (1.1) 4.3 Shareholding Pattern (%) Jun 16 Sept 16 Promoter 62.8 62.8 Public 37.2 37.2 Poor Operating Performance vs. 3QCY14 1 Year Stock Price Performance As the Company s 3QCY15 performance was impacted due to ban in Maggi, we believe that it is sensible to compare 3QCY16 numbers with those of 3QCY14, which was a normal quarter. Revenue, EBITDA & PAT declined by 8%, 16% & 13% vis-à-vis 3QCY14. EBITDA margins fell by 160bps to 19.1% in 3QCY16 from 20.7% in 3QCY14. 7,500 7,000 6,500 6,000 Improved Thrust on New Products 5,500 5,000 Over the past two quarters, Nestlé has introduced more than 25 new products and variants in the Indian market, which are anticipated to propel volume growth, going forward. Following attainment of a clear market leadership in instant noodles space, Nestlé has launched Maggi Hot Heads range that is expected to drive growth in valueadded segment 4,500 4,000 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 May-16 Note: * CMP as on November 01, 2016 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Outlook & Valuation Nestlé India s performance in CY15 was impacted due to ban on Maggi, but notably the performance of its ex-maggi portfolio has not been that encouraging. Introducing our estimates for CY18E, we expect Nestlé to report revenues of Rs110.3bn & Rs126.9bn and net profit of Rs13.6bn & Rs15.7bn in CY17E & CY18E, respectively. Based on expected CY18E EPS of Rs162.7, the stock currently trades at P/E multiple of 41.7x CY18E earnings. Nestle s multiples are extremely rich and we believe that there are better investment opportunities in the FMCG sector at inexpensive valuations. We reiterate our recommendation on the stock with an upwardly revised Target Price of Rs5,974 (from Rs5,823 earlier). Key Financials (Rs mn) CY15 CY16E CY17E CY18E Sales 81,233 96,143 110,328 126,908 EBITDA 15,029 18,626 21,985 25,356 Net profit 5,833 11,302 13,566 15,687 EPS Rs) 112.4 117.2 140.7 162.7 DPS (Rs) 48.5 55.0 60.0 60.0 P/E (x) 60.4 57.9 48.2 41.7 P/B (x) 23.2 19.6 16.3 13.3 EV/EBITDA (x) 42.3 33.9 28.1 23.7 ROE (%) 38.3 36.8 36.9 35.1 Dividend yield (%) 0.7 0.8 0.9 0.9 Research Analyst: Sameer Deshmukh Contact: 022 33201327 Email: sameer.deshmukh@relianceada.com Source: Company, RSec Research 1

Bloomberg Ticker NEST IN Risks to the view XX Increased competitive intensity in all key segments XX Higher input costs due to spiralling inflation in agricultural commodities Exhibit 1: Result summary (Rs mn) 3QCY16 3QCY15 % yoy 2QCY16 % qoq 9MCY16 9MCY15 % chg % qoq Net Sales 23,462 17,362 35.1 22,561 4.0 68,980 61,768 11.7 17.9 Consumption of RM 9,860 7,429 32.7 9,495 3.8 29,206 26,608 9.8 21.9 (% of Sales) 42.0 42.8 42.1 42.3 43.1 Staff Costs 2,704 2,340 15.6 2,407 12.3 7,819 6,697 16.7 4.9 (% of Sales) 11.5 13.5 10.7 11.3 10.8 Advertising (% of Sales) 0.0 0.0 0.0 0.0 0.0 Other Expenses 6,595 4,981 32.4 6,526 1.1 18,804 16,834 11.7 8.7 (% of Sales) 28.1 28.7 28.9 27.3 27.3 Total Expenditure 19,159 14,750 29.9 18,428 4.0 55,829 50,139 11.3 14.9 Operating Profit 4,303 2,613 64.7 4,133 4.1 13,151 11,629 13.1 31.6 OPM 18.3 15.0 18.3 19.1 18.8 Depreciation 882 906 (2.6) 889 (0.8) 2,663 2,576 3.4 (0.6) EBIT 3,420 1,707 100.4 3,243 5.5 10,488 9,054 15.8 42.4 Interest 1 0 200.0 1 40 35 13.5 Other Income 547 334 63.9 522 4.8 1,485 1,218 21.9 3.2 PBT 3,967 2,041 94.4 3,765 5.4 11,934 10,237 16.6 36.0 (% of Sales) 16.9 11.8 16.7 17.3 16.6 Provision for Taxation 1,273 553 130.0 1,136 12.0 4,023 1,675 140.2 94.7 (% of PBT) 32.1 27.1 30.2 33.7 16.4 PAT (recurring) 2,694 1,487 81.1 2,628 2.5 7,911 8,563 (7.6) 14.5 Extr. Income/(Expense) - (245) (320) (318) (4,762) Reported PAT 2,694 1,242 116.9 2,308 16.7 7,592 3,801 99.8 28.6 PATM 11.5 7.2 10.2 11.0 6.2 Equity shares (mn) 96 96 96 96 96 EPS (Rs) 27.9 12.9 116.9 23.9 16.7 78.7 39.4 99.8 Source: Company, RSec Research 2

Profit & Loss Statement Y/E Dec (Rs mn) CY15 CY16E CY17E CY18E Net Sales 81,233 96,143 110,328 126,908 Total operating income 81,233 96,143 110,328 126,908 % chg (17.2) 18.4 14.8 15.0 Total Expenditure 66,204 77,517 88,343 101,552 Cost of Materials 34,689 40,692 46,867 54,112 Advertising Exp (Incl Promotion) 5,252 6,025 6,683 7,687 Personnel 8,374 9,714 11,171 12,847 Others 17,888 21,086 23,621 26,906 EBITDA 15,029 18,626 21,985 25,356 % chg (24.2) 23.9 18.0 15.3 (% of Net Sales) 18.5 19.4 19.9 20.0 Depreciation& Amortisation 3,272 3,677 3,902 4,273 EBIT 11,757 14,949 18,083 21,082 % chg (28.6) 27.2 21.0 16.6 (% of Net Sales) 14.5 15.5 16.4 16.6 Interest & other Charges 33 50 50 50 Other Income 1,621 1,970 2,215 2,381 (% of PBT) 12.1 11.7 10.9 10.2 Recurring PBT 13,345 16,869 20,248 23,414 % chg (24.5) 26.4 20.0 15.6 Extraordinary items 5,008 - - - PBT (reported) 8,337 16,869 20,248 23,414 Tax 2,504 5,567 6,682 7,727 (% of PBT) 30.0 33.0 33.0 33.0 PAT (recurring) 5,833 11,302 13,566 15,687 % chg (50.8) 93.8 20.0 15.6 (% of Net Sales) 7.2 11.8 12.3 12.4 Basic EPS (Rs) 112.4 117.2 140.7 162.7 Fully Diluted EPS (Rs) 112.4 117.2 140.7 162.7 % chg (7.9) 4.3 20.0 15.6 3

Balance Sheet Y/E Dec (Rs mn) CY15 CY16E CY17E CY18E Share capital 964 964 964 964 Reserves 27,214 32,359 39,207 48,176 Net worth 28,178 33,323 40,171 49,141 Total borrowings 177 - - - Deferred tax 1,729 1,729 1,729 1,729 Total liabilities 30,085 35,052 41,900 50,870 Gross block 51,174 53,174 55,174 57,174 Less: Depreciation 22,195 26,072 30,175 34,648 Net block 28,979 27,102 24,999 22,525 CWIP 2,308 1,308 1,308 1,308 Investments 13,249 13,249 13,249 13,249 Current assets 16,269 21,405 35,697 52,265 Inventories 8,208 8,033 8,642 9,941 Debtors 784 934 1,072 1,233 Cash 4,996 10,471 23,984 39,060 Loans and advances 2,281 1,968 2,000 2,032 Current liabilities 12,095 10,942 12,613 14,620 Provisions 18,625 17,070 20,740 23,857 Net current assets (14,451) (6,607) 2,344 13,787 Total assets 30,085 35,052 41,900 50,870 4

Cash Flow Statement Y/E Dec (Rs mn) CY15 CY16E CY17E CY18E Net profit 5,833 11,302 13,566 15,687 Depn and w/o 3,272 3,677 3,902 4,273 Deferred tax 0 0 0 0 Change in working cap 3,451 (2,369) 4,562 3,633 Operating cash flow 12,556 12,610 22,031 23,593 Capital expenditure (804) (1,000) (2,000) (2,000) Investments (5,131) 0 0 0 Investing cash flow (5,935) (1,000) (2,000) (2,000) Free cash 6,621 11,610 20,031 21,593 Dividend (5,430) (6,158) (6,718) (6,718) Fresh equity 0 0 0 0 Debt/Preference shares (18) (177) 0 0 Financing cash flow (5,448) (6,335) (6,718) (6,718) Others (635) 200 200 200 Net change in cash 537 5,475 13,513 15,076 Opening cash 4,458 4,996 10,471 23,984 Closing cash 4,996 10,471 23,984 39,060 Key Ratio Y/E Dec CY15 CY16E CY17E CY18E Valuation Ratio (x) P/E (on FDEPS) 60.4 57.9 48.2 41.7 P/CEPS 71.9 43.7 37.5 32.8 P/BV 23.2 19.6 16.3 13.3 Dividend yield (%) 0.7 0.8 0.9 0.9 EV/Sales 7.8 6.6 5.6 4.7 EV/EBITDA 42.3 33.9 28.1 23.7 Per Share Data (Rs) EPS (Basic) 112.4 117.2 140.7 162.7 Cash EPS 94.4 155.4 181.2 207.0 DPS 48.5 55.0 60.0 60.0 Book Value 292.3 345.6 416.6 509.7 Returns (%) RoCE 38.2 36.8 37.0 35.2 RoE 38.3 36.8 36.9 35.1 Turnover ratios (x) Asset Turnover (Gross Block) 2.9 3.1 3.0 2.8 Inventory / Sales (days) 45 38 36 36 Receivables (days) 4 4 4 4 Payables (days) 67 52 52 53 Working capital cycle (ex-cash) (days) (18) (10) (13) (13) 5

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