Nestle India – Earnings Weakness Continues

Nestle India reported 1QCY10 results on April 22. Net sales were Rs14.8bn (+16.9% yoy) vs.consensus of Rs15bn and our estimate of Rs15.2bn. Net income reported was Rs2,019 mn (+2.3% yoy), 11.1% lower than consensus of Rs2,270 mn and 18.5% lower than our estimate of Rs2,477 mn. EPS reported was Rs20.94 (+2.3% yoy) vs. estimate of Rs25.69. While domestic sales were volume led, export sales were adversely affected by the strength of the Rupee. The bottom line was significantly affected by record commodity price levels.

There is significant focus on improving distribution reach and various low unit packs (now c30% of sales) have been launched across product segments to enhance affordability and get new consumers on board, aiding higher growth in tier 4 & smaller towns/villages. Raw material inflation and higher brand spends led to muted earnings growth.

Valuations & Earnings – Nestle at 28XCY11E P/E is the most expensive stock at 30% prem to FMCG sector & 10% prem to last 5-yr avg. This appears rich given earnings growth trending down to be in line with sector growth. Nestle is expected to report an EPS of Rs 84 and Rs 101 for FY 10 and FY 11 respectively. Goldman Sachs and Merrill Lynch have set a target price of Rs 2,300 for the stock.