Multi Baggers

Nestle India Limited

Best bet in the food processing space:

Changing consumer preferences from unpacked/unbranded foods to branded packaged foods will provide the US$70bn Indian food processing industry a robust growth opportunity. While most of the product segments are witnessing under penetration via-a-vis other countries, increasing presence of organized retail is shoring up demand. Cumulatively, these opportunities are expected to translate into 20% CAGR for the industry over the next few years. Nestle, with its strong presence in milk and milk based products, beverages, prepared dishes, chocolates & confectionery and baby foods segment is the best play in such scenario as it garners more than 90% of its revenues from the domestic business.

Low penetration levels across categories:

Segment wise brand positioning:

Robust brand portfolio …enjoys strong pricing power:

Nestle has a strong product portfolio with some of the best-known brands globally, such as Nescafe, Maggi, KitKat, Polo and Milo. Its major brands - Maggi, Nestle, Nescafe, KitKat are amongst the top 50 brands in India. Nestle enjoys leadership position in Noodles (~90% share) and Baby Foods (~85% share) segment, which account for over 65% of its revenues. In the Chocolates and Coffee  segments, Nestle has achieved a market share of ~25% and ~60% respectively. With the dominant market share across most of the categories, Nestle is able to launch its brand extensions successfully. Compared to other FMCG players, Nestle is less exposed to regional competition as the manufacturing process in most of its product categories is more technology intensive.

Margins to sustain at 20-21% level:

Firm prices of most of the key raw materials like milk, coffee, wheat, vegetable oils and sugar impacted operating margins of most of the FMCG players over the past few quarters. However Nestle, with its strong pricing power and brand equity was comparatively less impacted. Also, the long-term sourcing relationships for key ingredients helped Nestle in mitigating the input cost impact. Over the past one month, coffee and vegetable oil prices have started correcting in the international markets. Milk and wheat prices are expected to remain firm while sugar prices are  likely to be stable. We expect Nestle to maintain its operating margins in the range of 20-21%.

Fiscal benefits to drive bottomline growth:

Nestle has set up a manufacturing facility for culinary products at Pantnagar in Uttaranchal. With the commencement of production at this facility, the company has been able to save heavily on excise and taxes. With increasing production from the Pantanagar facility, income tax rate will reduce further driving earnings growth going forward. We expect Nestle to register 16.7% CAGR in net profit over CY07-10.

Financials:

Valuation and recommendation:

We believe with the extensive product portfolio and strong brand recall, Nestle will be the best play in the rising Indian processed foods sector. Nestle has consistently recorded strong double-digit growth over the past fourteen quarters in domestic sales. With the increasing share of prepared dishes and cooking aids from the Uttaranchal plant, the excise duty burden has also reduced. Strong portfolio of brands like Nestle, Maggi, Nescafe, expansion plans in the food business and new product launches will drive growth. At the current market price of Rs 1,352.30, the stock is trading at 16.8x CY10E EPS of Rs 80.7. We recommend BUY with a price target of Rs1,597, an upside of 18.1%.

Disclaimer:

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