Markets: Eerie calm

Markets: Eerie calm

it is not clear when market sentiment can change; as in the past, it can be quite sudden.
At a turn and yet not

At a turn and yet not

RBI could be tempted to cut policy rate to support growth at its bi-monthly review.

Maintain sell on Nestle India, target Rs 4,500, says Kotak Institutional Equities

Apr 03 2014, 12:17 IST
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Rich valuations demand a turnaround, which we do believe will happen at some point. Reuters Rich valuations demand a turnaround, which we do believe will happen at some point. Reuters
SummaryNot only have Nestle India’s absolute growth/return metrics deteriorated in the recent years, the company has also underperformed competitors.

Not only have Nestle India’s absolute growth/return metrics deteriorated in the recent years, the company has also underperformed competitors. Rich valuations demand a turnaround, which we do believe will happen at some point. Maintain ‘sell’ with a target price of R4,500 a share.

Nestle’s strong belief in its strategic drive towards a more ‘value-added’ portfolio, while slowly moving away from ‘price-point packs’, remains unchanged. That the company’s performance (volume growth, value growth, EPS growth, return ratios) has deteriorated in the recent years is a fact. What is arguable is whether the company’s strategic choices have led to the deterioration.

The debate around any key strategic shift is never a short-term one; even as the initial results of portfolio rationalisation do not encourage, attributing the recent underperformance to the portfolio-related strategic choices is, at best, conjecture.

We do think, however, that some of the SKU-related decisions that Nestle has taken in the recent years, especially a reluctance to be in the low-price SKUs, may be suboptimal in certain cases — essentially due to reduced competitiveness in the new user recruitment market.

Losing the mindshare of these low profitability ‘new’ users when they are entering the category as consumers is a risky bet, even from a medium-to-long-term perspective. At a P/E multiple of 37X forward earnings, we find Nestlé’s valuations expensive given volatile volume growth, weakening consumption trends and significantly lower-than-historical return ratios.

Kotak Institutional Equities

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