14 February 2014
4QCY13 Results Update | Sector:
Consumer
Nestle India
BSE SENSEX
20,367
Bloomberg
S&P CNX
6,048
NEST IN
CMP: INR5,075
TP: INR5,065
Neutral
Equity Shares (m)
96.4
M.Cap. (INR b) / (USD
489.3/7.9
b)
52-Week Range (INR) 5,865/4,410
1, 6, 12 Rel. Per (%)
1/-8/6
Financials & Valuation (INR Billion)
Y/E DEC
Sales
EBITDA
PAT
EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA(x)
Div. Yield (%)
2013
90.6
19.8
11.8
121.9
6.8
251.1
57.0
55.3
45.3
41.6
20.2
24.5
1.0
2014E
104.4
22.8
13.8
143.5
17.7
286.7
53.4
58.5
72.3
35.4
17.7
20.8
1.8
2015E
119.1
25.9
16.3
168.8
17.7
328.7
54.9
63.3
72.5
30.1
15.4
17.9
2.5
Results below expectations:
Nestle India’s (NEST) 4QCY13 results were below
estimates and underscored the slowdown in urban consumption. Sales, EBITDA and
PAT were at INR22.5b (up 4.6%, est. INR24b), INR4.7b (down 6%, est INR5.5b) and
INR2.9b (down 1.5%, est INR3.2b) respectively. EBITDA margin declined 220bp to
20.8%.
Sales growth of 4.6% was led by 21% YoY growth in exports, which was in-turn driven
by exports to affiliates and currency depreciation.
Domestic sales growth at decadal low:
Domestic sales posted a sub-par 3.7% YoY
growth, lowest in ~10 years (3.1% growth in June 2004). This growth was primarily led
by pricing and mix, as per management.
EBITDA decline after 15 quarters:
Gross margin contracted 180bp to 53.4% (est.
54.5%) due to mix deterioration in favor of exports, in our view. Gross margin
contraction is the first in last 10 quarters. Thus, EBITDA margin declined 220bp (YoY
flat) to 20.8% (est. 22.8%), exacerbated by 40bp increase in other expenses. EBITDA
declined 5.7% to INR4.7b (est. INR5.5b), first time in 15 quarters.
PAT down 2%:
Lower depreciation expenses (down 9.4% YoY), interest cost (flat YoY)
and higher other income (doubled YoY) resulted in flat PBT. Higher tax rate (up 120bp
YoY) led to 1.5% adj PAT decline. Reported PAT grew 1% due to lower provisions.
CY13 highlights:
CY13 sales, EBITDA and PAT have grown 9%, 8.5% and 8%,
respectively. NEST has become net cash with an amount of INR1.9b in year-end. We
lower the estimates by 2-6%.
Valuation and view:
At CMP, the stock trades at 35.4x CY14E EPS and 30x CY15E EPS.
Demand/volume revival is key for the sustenance of NEST’s premium valuations, in our
view, and we do not expect this soon given muted consumer sentiments and weak
macros. Maintain
Neutral
rating on the stock with a revised target price of INR5,065
(30x CY15E), 10% premium to ITC.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Investors are advised to refer through disclosures made at the end of the Research Report.

Nestle India
Domestic sales up 4.6%; gross margins expand 180bp; EBITDA margins
down 220bp
Sales growth of 4.6% was led by 21% YoY growth in Exports which was in-turn
driven by Exports to affiliates and currency depreciation.
Domestic sales posted a lackluster 3.7% YoY growth despite a not so heavy base
(9.6% growth in base). This was primarily led by combination of net realizations
and product mix improvement. We note that 3.7% domestic sales growth is the
lowest in almost a decade. Before this quarter, Domestic sales in June’04 had
grown just 3.1% growth.
Gross margins declined 180bps YoY, due to mix deterioration on account of
lower growth in domestic sales, in our view. This contraction is after ten
consecutive quarters of gross margin expansion.
EBITDA margins declined 220 bps to 20.8% vs. our estimate of 23%. EBITDA
declined 5.7% YoY, first time in 15 quarters.
Other income doubled to INR 426m due to higher cash balance. Nestle’s balance
sheet has turned net cash in CY13 with closing net cash balance of INR1.86b vs.
net debt of INR4.5b in CY12.
Depreciation declined 9.4%; interest expenses stayed flat aiding flat PBT despite
YoY decline in EBITDA.
Tax rate was higher by 120bp YoY due to surcharge on corporate tax.
Consequently Adj PAT Declined 1.5% and came in at INR2.89b (est. INR3.18b).
CY13 Sales, EBITDA and have grown 9%, 8.5% and 8% growth, respectively.
Board has declared a final dividend of INR12.5/share. Along with two interim
dividends of INR36/share, cumulative dividend payout for CY13 stands at
INR48.5/share, flat YoY. With better cash generation and capex programme
behind, we expect dividend payout ratio to improve from the ~40% of CY13.
Domestic sales remains tepid
Domestic Sales (INR m)
23.1 20.9
20.7
Growth (%)
…and growth lowest in almost a decade
Domestic sales growth (%)
28.8
23.0
25.3 27.8
20.7
16.0 16.7
20.9
13.7
13.7
9.6
7.6
7.7
8.0
16.7
13.7 13.7
9.6
7.6
9.2 8.0
3.7
19.6
13.8
7.7
9.2 3.7
Source: MOSL, Company
Source: MOSL, Company
14 February 2014
2

Nestle India
While Exports benefitted from currency depreciation
Exports Growth (%)
46.9
10.2
-3.4
-15.1
-17.3
23.2
3.3
4.6
20.6
20.9
21.3
51.2
19.5
50.5
20.9
73.9
Gross margins contract after 10 quarters
Gross Margins (%)
54.322.3 21.6 21.0
21.1
51.8
54.2 54.6
54.1
EBITDA Margin (%)
23.0 23.7
22.0
55.2 54.8
54.8
21.0
20.8
55.0
53.4
36.2
11.6
1.0
11.2
20.4
-1.1
Source: MOSL, Company
Source: MOSL, Company
Change in estimates
INR M
Net Sales
EBITDA
Adjusted PAT
New
2013 2014E
2015E
90,619 104,407 119,080
19,805 22,760 25,890
11,754 13,832 16,278
Old
2013
2014E
92,076 107,363
20,596
23,795
12,038
14,495
2015E
124,382
27,678
17,306
% Change
2013 2014E 2015E
-1.60 -2.80 -4.30
-3.80 -4.40 -6.50
-2.40 -4.60 -5.90
Source: Company, MOSL
Valuation and view
We have cut our estimates by 2-6%.
Multi-year low domestic sales growth highlights the continued stress in urban
consumption, especially in premium foods categories.
Impact of SKU rationalization strategy, undertaken by Nestle in CY12, is hurting
as well, in our view. In an environment of macro stress and consequent
consumption slowdown, this strategy is taking a toll on short term volumes and
likely preventing recruitment of new consumers in its categories, in our view.
Revival of urban consumption dynamics is a key pre-requisite for Nestle to go
back to high teen sales growth. Our channel checks do not suggest any
imminent revival in the same.
Maintain
Neutral
rating on the stock with a revised TP of INR5,065 (30x CY15E,
10% premium to ITC for its superior capital efficiency profile).
14 February 2014
3

Nestle India
Nestle India: an investment profile
Company description
Nestle India is the largest packaged food company in
India. A 63% subsidiary of Nestle S.A, the company has a
diversified portfolio with strong brands like Nescafe,
Everyday, Maggi etc. The company has taken up a huge
capacity expansion plan which will see it invest INR 25-
30b over the next 2-3 years to support its strong growth
trajectory.
Recent developments
Launched Alpino chocolate in the premium
segment.
Acquired 26% stake in Indocon Agro.
Mr. Etienne Benet took over as Managing Director
of Nestle India Limited w.e.f. Oct 01, 2013.
Revival of urban consumption dynamics is a key
pre-requisite for Nestle to go back to high teen
sales growth. Our channel checks do not suggest
any imminent revival in the same.
Maintain Neutral rating on the stock with a revised
TP of INR5,065 (30x CY15E, 10% premium to ITC
for its superior capital efficiency profile).
We have a cautious view on the sector on back of
inflationary pressure in the economy.
Companies with competitive position would be
better placed to withstand any slowdown in a
particular segment.
Longer term prospects bright, given rising incomes
and low penetration.
We prefer companies with earnings visibility in an
environment where consumption is moderating
Valuation and view
Key investments arguments
NEST is in a dominant position and best placed to
capture the huge opportunity in processed foods.
The company's strong pricing power and healthy
innovation pipeline enables profitable volume
growth.
Investment risks
Sector view
Continued input cost pressure could impact margins
in the near term.
Steep valuations leave little room for
disappointment.
Comparative valuations
P/E (x)
EV/EBITDA (x)
EV/Sales (x)
P/BV (x)
CY13E
CY14E
CY13E
CY14E
CY13E
CY14E
CY13E
CY14E
Nestle
41.6
35.4
24.5
20.8
5.4
4.5
20.2
17.7
HUL
36.2
33.6
26.8
23.5
4.3
3.8
22.2
19.2
ITC
31.1
26.2
11.6
16.8
7.3
6.3
11.6
10.5
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
143.5
168.8
Consensus
Forecast
142.5
168.6
Variation
(%)
0.7
0.1
Target price and recommendation
Current
Price (INR)
5,075
Target
Price (INR)
5,065
Upside
(%)
-0.2
Reco.
Neutral
Shareholding pattern (%)
Promoter
Domestic Inst
Foreign
Others
Dec-13
62.8
5.9
13.6
17.8
Sep-13
62.8
6.3
13.0
17.9
Dec-12
62.8
7.2
11.7
18.3
Stock performance (1-year)
14 February 2014
4

Nestle India
Financials and valuation
14 February 2014
5

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Nestle India
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1. Analyst ownership of the stock
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NESTLE INDIA LTD
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Yes
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