JPMorgan

We remain ?neutral? on Nestl? India with a December 2013 price target of R4,270, implying a one-year forward P/E of 28x, which is at a discount to its past three-year average. We remain constructive on the company?s long-term growth potential, but see near-term challenges and current valuations at 35x CY13e and 30x CY14e P/E as limiting upside potential.

Nestl? India registered net sales, Ebitda and adjusted net profit growth of 10%, 20% and 10%, respectively, for Q4CY12. Operating margin expansion was better than expectations while sales growth was slightly below expectations. Our earnings estimates are largely unchanged. Volume growth continues to remain subdued given severe impact from aggressive pricing, portfolio/channel optimisation and weak consumer sentiment.

Domestic sales growth moderated to 10% versus 11.5% seen over nine months (April-December) of CY12. Sales growth has been affected adversely by portfolio/channel optimisation, aggressive pricing and challenging macro. We believe much of the growth has been led by higher pricing and improved mix. Exports sales growth was, however, strong at 21%, contributed largely by exports to third parties, which rose 47% y-o-y. The company management is cautious in the short term, given uncertain macro.

Nestle India continued to manage RM inflation with strong pricing and improved channel/product mix, leading to a 90 basis points (bps) y-o-y expansion in gross margins. Ebitda margins were further supported by moderate increase in other expenses (up 3% y-o-y), adding 160 bps to margins. However employee costs rose (up 20% y-o-y, up 70 bps) due to increased headcount to support business expansion, leading to net 190 bps y-o-y increase in operating margins. Other income grew 17% due to higher exports incentives.

The company did not draw any new debt for capacity expansion during the quarter with total debt outstanding at R1,010 crore ($192 million). However company has repaid nearly all the short-term loans. Depreciation costs increased 87% y-o-y due to significant capacity expansion undertaken over the past year. Adjusted interest costs were at R9.9 crore due to higher debt (on a y-o-y basis).