Retain ‘neutral’ on Nestle India with a target price of R4,680 per share, which implies P/E multiple of 28x on our four forward quarters earnings estimates of R167. We came back from the analyst meeting with mixed feelings. Nestle seems to be clearly focused on driving long-term growth and are starting to make incremental changes to the portfolio to drive the change. However, near-term growth pressures remain and combined with strong milk prices and rising advertising spends, will likely cap earnings growth.
According to the management, growth so far has been driven primarily by pricing (in the last couple of years), due to multiple reasons such as slowdown in consumer spending, economic growth faltering, rising competition across categories, and portfolio rationalisation. While some of the above-mentioned factors remain intact, the company will try to drive growth through volumes rather than pricing henceforth.
Demand conditions remain weak. While inflation and fuel prices have been coming down, there is yet to be any meaningful impact of it on the consumer spending. FMCG sector value growth has slowed from 11.9% in the nine months of CY13 to 6.7% in the nine months of CY14, and F&B business growth has slowed from 13.6% to 8.5% during the same time. There are yet no signs of any kind of demand pick-up either in the urban or rural markets.