7/29/2019 NestleIndia QC

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March 25, 2013

ICICI Securities Ltd|Retail Equity Research

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We /I, Sanjay ManyalMBA, Parineeta Poddar MBA

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Royalty to increase to 4.5% by CY18

Nestl Indias board has approved a 1.1% increase in royalty payment toits Swiss based parent, Nestle SA, from January 1, 2014 onwards. Theincrease will be effected in a staggered manner with an increase of 20 bpseach year spread over a period of five years. Consequently, Nestlsroyalty payment would be increased from 3.5% in CY13E to 4.5% byCY18E. The increase by 0.2% in CY14E would impact the earnings by~| 22 crore, bringing down the EPS by ~| 2/share to | 145.6. We believethat given the high EBITDA margins (~22% in CY14E) and comfortableearnings (~13% in CY14E) of Nestl, the impact until CY14E is mild. Weare revising down our target price to | 4993/share, led by the marginal cutin EPS estimate. We have a HOLD rating on the stock.In spite of the increase in royalty, Nestl would benefit from the prevailing

high margins (22% in CY14E) until CY14E. However, the impact thereafter

needs to be watched. Going ahead, we believe that in order to sustain the

current high margins, Nestl will have to pass on the increase in royalty

through price increases. This, in turn, would impact the already strained

volume growth of the company.

Nestls volume growth slowed down to ~6% in the past two years from

~16% in CY08-11. This has been led by the increasing competition in its

key categories from players such as ITC in noodles (brand Sunfeast),Britannia and Danone in milk, HUL and Tata Global in beverages and

Cadburys in chocolates. Further, the slowing consumer demand has kept

the demand for the companys premium priced products low. Hence,

going ahead, if price increases are continued by the company to pass on

the higher royalty, volume growth could remain subdued with revenue

growth being largely price led.

We have revised our target price downwards to | 4993/share led by the

cut in EPS to | 145.6/share. We have a HOLD rating on the stock.

Nestl India (NESIND)

| 4707

ing matrix

ng : Hold

get : | 4993

get Period : 12 months

ential Upside : 6%

y Financials

Crore CY11 CY12 CY13E CY14E

t Sales 7,491 8,302.3 9,694.4 11,094.1

ITDA 1,552.8 1,824.0 2,147.3 2,445.1

t Profit 961.6 1,067.9 1,239.9 1,403.5

S (|) 99.7 110.8 128.6 145.6

uation summary

CY11 CY12 CY13E CY14E

E (Adjusted) 44.5 42.7 36.6 32.3

kt Cap/Sales 6.1 5.5 4.7 4.1

/ EBITDA 29.8 25.3 21.4 18.3

BV 35.6 25.2 20.6 20.1ce / Sales 6.1 5.5 4.7 4.1

NW 75.5 59.4 56.4 62.1

CE 62.3 54.1 61.1 90.4

ck data

rket Capitalization 45,382.9

tal Debt (CY12) 1,050.2

sh and Investments (CY12) 236.9

46,196.2

week H/L 5040 / 4306

ity capital 96.4

e value | 10

Holding (%) 7.3 Holding (%) 11.3

alysts name

njay Manyal

njay.manyal@icicisecurities.com

rineeta Poddar

rineeta.poddar@icicisecurities.com