Nestle – Results Don’t Justify Stock Premium

Nestle India’s Revenue growth was healthy at 18% Y/Y; driven by 18% domestic growth (both volumes and pricing led) and 11% in exports. Reported PAT rose c39% Y/Y to Rs1.83bn and was lower than our estimate (Rs1.9bn) as EBITDA margin expansion of 160 bps to 20.3%.

Gross margins may witness some pressure ahead, as prices of key commodities (milk solids and sugar) are firming up. While Nestle’s expansion into rural markets is a positive long-term opportunity but with issues of deteriorating product mix.

Nestle is expected to report an EPS of Rs 85 to 87 and 100 to 106 for fy 10 and fy11 respectively according to various FII estimates. Nestle is a good play on India’s urban consumption story, current valuations at 30x one-year forward P/E leave no room for Investors.