Maintain ‘hold’ on Nestle India with a target price of R7,749 a share. Nestle’s strong brand portfolio with higher urban salience and lower per capita consumption render it the best play on a potential urban recovery. At the current stock price, the stock is trading at 47.7x and 38.1x CY15e and CY16e EPS, respectively.
Nestle Q1CY15 sales and PAT came in line with our estimates. Key positives include: Seven-year high gross margin at 57.8%, which expanded 389 bps y-o-y, largely led by price hikes; Ebitda margin at 24.2% was at six-year high and expanded 296 bps y-o-y; and a five-quarter high export growth of 19.2% y-o-y. Key negative was slowdown in domestic sales growth to 7.6% y-o-y (11.3% y-o-y in Q4CY14), a trend also visible in GSK Consumer (sales growth slowed from 16.2% y-o-y in Q3FY15 to 8% y-o-y in Q4FY15).
Nestle has stepped up promotional activities to boost volumes and is driving premiumisation via new launches (Kitkat Senses, Extra Smooth). The company will be key beneficiary of the anticipated urban recovery, which will be further aided by its premiumisation focus. However, ITC can potentially be a formidable competitor in coffee and dairy due to its track record of new launches in foods.
Nestle’s seven-year high gross margin up 389 bps y-o-y, was by better realisation. Expansion will continue (fresh milk and its derivatives prices continue to fall) as low priced inventory comes into the system.