3QCY2012 Result Update | FMCG

November 16, 2012

Nestle India
Performance Highlights
Quarterly Performance
(` cr) Revenue EBITDA OPM (%) PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price
Investment Period
3QCY11 1,963 410 20.9 261 % yoy 7.8 8.1 6bp 2.3 2QCY12 1,987 429 21.6 247 % qoq 6.5 3.2 (66)bp 8.1

`4,709 -

3QCY12 2,116 443 21.0 267

Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code FMCG 45,405 609 0.5 5024/3930 6,711 10 18,309 5,574 NEST.BO NEST@IN

For 3QCY2012, Nestle India (Nestle) reported a weak performance, both on the top-line and the bottom-line front. The top line growth at 7.8% yoy to `2,116cr was the lowest in the past several quarters with volume growth under pressure. The net profit grew by 2.3% yoy to `267cr. Key highlights during the quarter: Domestic sales grew by 7.6% yoy. Exports to third parties grew by 29.7%, while exports to affiliates declined by 4.7% yoy. INR depreciation impacted the growth in sales favorably by 11.6%. Sales growth was affected due to portfolio optimization and pricing for value in certain products. Gross margins improved by 255bp yoy despite higher input costs due to better realization and superior product mix. Employee costs as a percentage of sales increased by 65bp on a yoy basis. Other expenses as a percentage of sales too rose by 155bp on a yoy basis. Thus, the OPM remained flat at 21.0%. Depreciation too rose by 86.8% on a yoy basis due to capacity addition carried out by the company. However, the bottom-line was boosted by reversal of `17.9cr (`12cr net of tax) relating to exchange differences arising out of interest on foreign currency borrowings pertaining to previous periods (year and quarter) due to change in the accounting policy. Outlook and valuation: We expect Nestle to post a top-line and bottom-line CAGR of 16% and 14.2% over FY2012-14E. At the current market price, Nestle is trading at rich valuations of 34.2x CY2013E EPS. Hence, we continue to maintain our Neutral view on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 62.8 7.8 11.4 18.1

Abs. (%) Sensex NEST

3m 3.7 6.3

1yr 9.1 6.6

3yr 7.5 79.7

Key financials
Y/E March (` cr) Net Sales % chg Net Profit (Adj.) % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2010 6,255 21.9 819 25.0 20.0 84.9 55.5 53.1 114.0 149.4 7.2 36.1

CY2011 7,491 19.8 962 17.5 20.7 99.7 47.2 35.6 90.3 88.1 6.0 29.7

CY2012E 8,529 13.9 1,090 13.4 20.8 113.1 41.6 25.0 70.5 57.9 5.3 26.1

CY2013E 10,079 18.2 1,329 21.9 21.1 137.8 34.2 17.5 60.2 58.0 4.5 21.3

V Srinivasan
022-39357800 Ext: 6831 [email protected]

Please refer to important disclosures at the end of this report

Nestle India | 3QCY2012 Result Update

Exhibit 1: Quarterly Performance

Y/E Dec (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr Items) Extr Income/(Expense) PBT (incl. Extr Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Recurring PAT Equity shares (cr) EPS (`)
Source: Company, Angel Research

3QCY12 2,116 971 45.9 167 7.9 534 25.2 1,672 443 21.0 (8) 74 17 395 8 387 18.3 120 30.3 267 12.6 275 9.6 28

3QCY11 1,963 945 48.2 142 7.3 465 23.7 1,553 410 20.9 1 39 12 382 7 375 19.1 113 29.7 261 13.3 269 9.6 27

% yoy 7.8 2.7 17.4 14.8 7.7 8.1

2QCY12 1,987 902 45.4 167 8.4 488 24.6 1,557 429 21.6 22

% qoq 6.5 7.6 0.3 9.4 7.4 3.2

9MCY12 6,150 2,812 45.7 488 7.9 1,519 24.7 4,820 1,330 21.6 17

9MCY11 5,536 2,701 48.8 400 7.2 1,294 23.4 4,396 1,140 20.6 2 109 33 1,062 20 1,042 18.8 312 29.3 731 13.2 751 9.6 76

% chg 11.1 4.1 22.0 17.4 9.6 16.7 827.2 78.1 28.5 9.4 9.8 14.0 8.0 7.4

86.8 43.1 3.4 6.1 3.3 5.6 2.3 2.4 2.3

67 11 351 (3) 354 17.8 108 30.9 246 12.4 243 9.6 26

9.2 53.2 (95.1) (355.7) 9.2 10.3 8.7 13.2 8.7

194 42 1,162 18 1,144 18.6 355 30.6 789 12.8 807 9.6 82

Exhibit 2: 3QCY2012 Actual vs Angel estimates

(` cr) Revenue EBITDA OPM (%) PAT
Source: Company, Angel Research

Actual 2,116 443 21.0 267

Angel Est. 2,217 439 19.8 270

% Diff. (4.6) 1.1 117bp (0.8)

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Nestle India | 3QCY2012 Result Update

Top-line growth moderate at 7.8% yoy

Nestle posted a 7.8% yoy growth in its top-line to `2,116cr, which was below our estimates. Domestic sales grew by 7.6% yoy mainly on account of better realizations and superior product mix. Exports to third parties grew by 29.7%, while exports to affiliates declined by 4.7% yoy. INR depreciation impacted the growth in sales favorably by 11.6%. Sales growth was affected due to portfolio optimization and pricing for value in certain products.

Exhibit 3: Top-line growth

2,500 2,000 1,500 (` cr) 1,000 1,637 1,671 1,810 1,763 1,963 1,955 2,047 1,987 2,116 500 3Q10 1Q11 Top-line (LHS) Source: Company, Angel Research 3Q11 1Q12 yoy growth (RHS) 3Q12 25.7 23.6 22.3 12.7 20.2 19.9 17.0 13.1 7.8 30.0 25.0 20.0 15.0 10.0 5.0 ( %)

OPM flat yoy, despite higher gross margins

Gross margins improved by 255bp yoy despite higher input costs due to better realization and superior product mix. Employee costs as a percentage of sales increased by 65bp yoy. Employee costs rose on both accounts - ie increase in headcount to support business expansions and pay hikes carried out by the company. Other expenses as a percentage of sales too rose by 155bp on a yoy basis. Thus, OPM remained flat yoy at 21.0%. Depreciation too rose by 86.8% on a yoy basis due to capacity addition carried out by the company. However, the bottom-line was boosted by reversal of `17.9cr (`12cr net of tax) relating to exchange differences arising out of interest on foreign currency borrowings pertaining to previous periods (year and quarter) due to change in the accounting policy.

November 16, 2012

Nestle India | 3QCY2012 Result Update

Exhibit 4: Gross Margin expands yoy, but OPM flat

60.0 50.0 40.0 50.9 52.4 51.2 50.5 51.8 54.6 54.2 54.6 54.1

Exhibit 5: Net Profit growth modest at 2.3%

310 260 210 (` cr) 90.0 80.0 70.0 60.0 276 267 256 261 40.0 30.0 20.0 10.0 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 PAT (LHS) yoy growth (RHS) ( %) 50.0 219 203 214 231 246

(%)

30.0 19.7 20.0 10.0 19.7

21.3

19.5

20.9

21.1

22.3

21.6

21.0

160 110 60 10

3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 OPM Gross margin

Source: Company, Angel Research

Source: Company, Angel Research

Investment Rationale
Best play on emerging growth opportunity in the foods and beverages space: Nestle enjoys a strong position across categories in the foods and beverages space through its diversified portfolio of established brands such as Maggi, Nescafe, Everyday, Kit Kat and Milkmaid. We are particularly bullish on underpenetrated categories such as instant noodles, value-added dairy products, chocolates and confectionery, which are witnessing an uptrend in consumer demand. However, valuations at ~250% premium to the Sensex capture full potential: At the current market price, Nestle is trading at ~250% premium to the Sensex, significantly ahead of its five-year average historical premium of ~110%. While Nestle has been able to maintain these premium valuations because of its strong parentage, dominant brands, and high RoE and OPM, we believe the current valuations capture the full potential of near-term growth. We remain cautious in terms of Nestl being able to maintain this triple-digit premium to the Sensex on account of muted volume growth and competition in the high-growth noodles category from HUL, GSKCHL and ITC.

Outlook and valuation

We expect Nestle to post a top-line and bottom-line CAGR of 16% and 14.2% over FY2012-14E. At the current market price, Nestle is trading at rich valuations of 34.2x CY2013E EPS. Hence, we continue to maintain our Neutral view on the stock.

November 16, 2012

Nestle India | 3QCY2012 Result Update

Exhibit 6: One-year forward PE

50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 Jun-09 Jun-10 Jun-11 Feb-09 Apr-09 Feb-10 Apr-10 Feb-11 Apr-11 Feb-12 Oct-08 Oct-09 Oct-10 Oct-11 Jun-12 Dec-08 Dec-09 Dec-10 Dec-11 Aug-09 Aug-10 Aug-11 Aug-12 Oct-12 Apr-12

Exhibit 7: Peer valuation

Company Asian Paints Britannia Colgate Dabur India Godrej Con GSK Con* HUL ITC Marico Nestle* TGBL Reco. Neutral Buy Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Mcap (` cr) 37,892 5,696 18,086 21,955 23,066 12,765 112,690 214,654 13,396 45,407 10,726 CMP (`) 3,950 477 1,330 126 678 3,035 521 275 218 4,709 173 TP (`) 584 Upside (%) 22 P/E (x) FY13E FY14E 31.9 26.1 36.6 28.2 29.7 27.2 35.4 29.4 35.3 41.6 26.2 27.0 19.3 31.3 24.1 24.5 23.0 30.6 25.1 28.0 34.2 22.2 EV/Sales (x) FY13E FY14E 3.2 0.9 5.6 3.6 3.8 3.7 4.2 6.9 2.8 5.2 1.4 2.7 0.7 4.9 3.0 3.1 3.1 3.7 5.9 2.3 4.4 1.3 RoE (%) FY13E FY14E 37.4 39.1 101.9 43.2 26.4 36.3 70.9 35.8 25.4 70.5 8.2 35.3 42.7 98.5 41.4 26.1 34.0 59.8 35.3 22.6 60.2 9.5 CAGR # Sales PAT 17.0 15.3 15.2 15.9 24.7 16.8 15.5 17.2 18.6 16.0 9.7 19.2 25.6 13.8 18.9 31.1 24.9 19.7 17.7 25.4 14.2 16.6

Source: Company, Angel Research; Note: #denotes CAGR for FY2012-14E;*December Year Ending

Exhibit 8: Angel vs. Consensus estimates

Top-line (` cr) Angel estimates Consensus Diff (%)
Source: Company, Angel Research

CY2012E 8,529 8,505 0.3

(x)

Source: Bloomberg, Angel Research; Note: Blue line represents 5-yr average

CY2013E 10,079 10,086 (0.1)

EPS (`) Angel estimates Consensus Diff (%)

CY2012E 113.1 113.6 (0.5)

CY2013E 137.8 137.6 0.1

Company Background
Nestl India, a 61.9% subsidiary of its global parent Nestl SA, is one of the largest and most diversified food and beverage (F&B) companies in India. The company's product portfolio in CY2010 comprised of milk products and nutrition (~44% of sales), prepared dishes and cooking aids (~27%), chocolates and confectionery (~15%) and beverages (~14%). While Nestl entered the Indian market way back in 1912, when it began as a trading company, its real activity in the country started in 1961 when it set up its first factory at Moga, Punjab, to develop milk. Nestl has seven factories across the country and is now involved in the manufacturing and marketing of a range of quality products across the F&B segment.

November 16, 2012

Nestle India | 3QCY2012 Result Update

Profit & Loss Statement

Y/E Dec. (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Cost of Materials Advertising Exp Personnel Others EBITDA % chg (% of Net Sales) Dep. & Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Asso. Recurring PBT % chg Extraordinary Exp./(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earn of asso. Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) FDEPS (`) % chg CY08 4,471 147 4,324 4,324 23.4 3,461 2,104 194 307 855 864 24.1 20.0 92 771 24.1 17.8 2 34 4.2 0 804 24.4 31 773 239 29.7 534 0 0 534 565 31.0 13.1 55.4 55.4 29.1 CY09 5,222 93 5,129 5,129 18.6 4,095 2,448 268 432 947 1,034 19.8 20.2 111 923 19.7 18.0 1 38 3.9 960 19.4 43 917 262 27.3 655 655 698 23.5 13.6 67.9 67.9 22.6 CY10 6,377 122 6,255 6,255 21.9 5,005 3,056 303 433 1,213 1,250 20.8 20.0 128 1,122 21.5 17.9 1 43 3.7 1,163 21.2 18 1,145 326 28.1 819 819 837 20.0 13.4 84.9 84.9 25.0 CY11 7,674 183 7,491 7,491 19.8 5,938 3,589 328 546 1,475 1,553 24.3 20.7 153 1,399 24.7 18.7 5 51 3.5 1,445 24.2 57 1,388 426 29.5 962 962 1,019 21.7 13.6 99.7 99.7 17.5 CY12E 8,773 244 8,529 8,529 13.9 6,759 4,089 409 614 1,646 1,770 14.0 20.8 230 1,541 10.1 18.1 43 60 3.8 1,557 7.8 0 1,557 467 30.0 1,090 1,090 1,090 7.0 12.8 113.1 113.1 13.4 CY13E 10,391 312 10,079 10,079 18.2 7,952 4,773 484 746 1,949 2,127 20.2 21.1 271 1,856 20.5 18.4 28 71 3.7 1,898 21.9 0 1,898 569 30.0 1,329 1,329 1,329 21.9 13.2 137.8 137.8 21.9

November 16, 2012

Nestle India | 3QCY2012 Result Update

Balance Sheet
Y/E Dec. (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,405 652 753 109 35 798 194 124 481 1,185 (387) 510 1,641 745 896 80 203 857 156 138 563 1,422 (566) 613 1,855 842 1,013 349 151 1,046 255 151 639 1,670 (624) 889 2,552 976 1,576 1,419 134 1,273 227 196 849 2,114 (840) 2,288 3,280 1,206 2,074 1,312 334 1,476 295 247 933 2,165 (689) 3,031 3,877 1,477 2,399 582 634 2,170 775 292 1,103 2,423 (252) 3,363 96 377 473 37 510 96 485 581 32 613 96 759 855 33 889 96 1,178 1,274 971 43 2,288 96 1,721 1,817 1,171 43 3,031 96 2,502 2,598 721 43 3,363 CY08 CY09 CY10 CY11 CY12E CY13E

Cash Flow Statement Y/E Dec. (` cr) Profit before tax Depreciation Change in Working Capital Interest / Dividend (Net) Direct taxes paid Others Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest / Dividend (Net) Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances CY08 773 92 84 (19) 239 21 713 (261) 60 (201) (3) 372 (19) (356) 156 38 194 CY09 917 111 131 (16) 262 (14) 868 (206) (168) (375) 547 (16) (531) (38) 194 156 CY10 1,145 128 140 (23) 326 (11) 1,052 (483) 53 (431) 545 (23) (522) 100 156 255 CY11 1,388 153 125 (22) 426 55 1,273 (1,767) 16 (1,751) 971 543 (22) 450 (28) 255 227 CY12E 1,557 230 (23) 3 467 (60) 1,240 (622) (200) (822) 200 547 3 (350) 68 227 295 CY13E 1,898 271 43 (47) 569 1,596 134 (300) (166) (450) 547 (47) (950) 480 295 775

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Nestle India | 3QCY2012 Result Update

Key Ratios
Y/E Dec. (` cr) Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (GB) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) 3 37 4 43 (7) 3 35 5 42 (7) 3 34 4 44 (7) 3 36 6 49 (7) 3 35 5 45 (9) 3 35 5 44 (10) 160.7 180.9 119.8 164.3 250.4 124.2 149.4 219.0 114.0 88.1 81.9 90.3 57.9 49.8 70.5 58.0 59.7 60.2 55.4 55.4 65.0 42.5 49.1 67.9 67.9 79.5 48.5 60.3 84.9 84.9 98.2 48.5 88.7 99.7 99.7 115.6 48.5 132.1 113.1 113.1 136.9 48.5 188.5 137.8 137.8 165.9 48.5 269.5 85.0 72.5 95.9 0.9 10.4 52.3 88.6 69.3 59.3 78.1 1.0 8.8 43.7 73.8 55.5 48.0 53.1 1.0 7.2 36.1 50.8 47.2 40.7 35.6 1.0 6.0 29.7 20.2 41.6 34.4 25.0 1.0 5.3 26.1 15.3 34.2 28.4 17.5 1.0 4.5 21.3 13.5 CY08 CY09 CY10 CY11 CY12E CY13E

November 16, 2012

Nestle India | 3QCY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Nestle India No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 16, 2012