We upgrade Nestle India to “in-line” (earlier ‘underperform’) and increase the price target to R5,100 (earlier R4,450), based on a forward PER of 30x. We expect sales growth to improve based on a better macro outlook and steps taken by the new leadership, leading to a 19% EPS CAGR over CY14-16E, versus 8% EPS CAGR in CY11-14E.
Given the sharp earnings downgrade in the past two years (compared to our estimates two years back, our CY14E EPS is now 26% lower) and the improving outlook, IER believes the earnings downgrade cycle is largely over. However, despite underperforming the FMCG Index and Sensex by 42% and 16%, respectively, in the past three years, valuations at a forward PER of 38x leaves little room for upside, in our view.
Nestle India’s domestic sales grew 9.7% y-o-y, which, while marginally higher than estimate, was the eighth consecutive quarter of single-digit growth. Overall net sales growth was lower at 9.3%, due to a moderate 4.1% growth in exports.
According to management, sales growth was mainly owing to higher realisations. A sharp increase in milk prices (up 25% year-on-year basis) led to gross margins declining 238 bps y-o-y to 52.4%.