1QCY2013 Result Update | FMCG

May 17, 2013

Nestle India
Performance Highlights
Quarterly Performance
(` cr) Revenue EBITDA OPM (%) PAT 1QCY13 2,248 533 23.7 279 1QCY12 2,047 457 22.3 276 % yoy 9.8 16.5 136bp 1.2 4QCY12 2,153 496 23.0 279 % qoq 4.4 7.5 67bp 0.1

NEUTRAL
CMP Target Price
Investment Period
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 47,918 448 0.4 5070/4306 3,508 10 20,286 6,187 NEST.BO NEST@IN

`4,970 -

Source: Company, Angel Research

For 1QCY2013, Nestle India (Nestle) reported a flat performance on the bottom-line front despite a 16.5% yoy growth in operating profit, impacted by higher depreciation and provisions. Volume growth remains weak. Key highlights during the quarter: Domestic sales grew at an unimpressive 7.7% yoy to `2,095cr with growth arising largely due to better realization and superior product mix. Gross margins improved by 65bp yoy despite increase in prices of raw materials like milk, sugar etc due to better realization and superior product mix. The OPM expanded by 136bp yoy, on account of expansion in gross margin and a yoy reduction in the proportion of other expenses to sales. Thus, operating profit rose by 16.5% yoy. During the quarter, the companys depreciation cost was higher by 55.6% yoy on account of the capacity addition undertaken by the company. The companys interest costs too rose on account of loans taken by the company for capacity expansion. During the quarter, the company also charged `20.7cr towards provision for contingencies due to change in certain regulatory procedures. Outlook and valuation: We expect Nestle to post a top-line and bottom-line CAGR of 14.9% and 16.2% over CY2012-14. At the current market price, Nestle is trading at rich valuations of 32.2x CY2014E 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 6.6 12.4 18.3

Abs. (%) Sensex NEST

3m 4.2 8.2

1yr 26.2 6.0

3yr 20.5 73.8

Key financials
Y/E Dec. (` 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

CY2011 7,491 19.8 942 15.0 20.5 98 50.9 37.6 88.5 86.9 6.3 30.7

CY2012 8,302 10.8 1,068 13.4 22.0 111 44.9 26.6 69.5 58.5 5.8 26.3

CY2013E 9,447 13.8 1,229 15.1 22.1 127 39.0 19.5 57.7 53.8 5.0 22.6

CY2014E 10,968 16.1 1,486 20.9 22.3 154 32.2 14.1 50.7 55.2 4.2 18.8

V Srinivasan
022-39357800 Ext: 6831 v.srinivasan@angelbroking.com

Please refer to important disclosures at the end of this report

Nestle India | 1QCY2013 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
Source: Company, Angel Research

1QCY13 2,248 1,016 45.2 171 7.6 529 23.5 1,715 533 23.7 8 82 20 463 32 430 19.1 151 32.7 279 12.4

1QCY12 2,047 938 45.8 155 7.6 497 24.3 1,590 457 22.3 2 53 14 416 13 403 19.7 127 30.6 276 13.5

% yoy 9.8 8.2 10.5 6.3 7.9 16.5 249.3 55.6 47.2 11.2 6.8 18.8 1.2

4QCY12 2,153 964 44.8 175 8.1 518 24.0 1,657 496 23.0 10 84 21 423 15 408 19.0 129 30.5 279 13.0

% qoq 4.4 5.3 (2.3) 2.2 3.5 7.5 (20.0) (1.7) (5.3) 9.3 5.4 16.9 0.1

CY12 8,302 3,776 45.5 663 8.0 2,037 24.5 6,477 1,826 22.0 27 277 63 1,585 33 1,553 18.7 485 30.6 1,068 12.9

CY11 7,491 3,589 47.9 546 7.3 1,802 24.1 5,938 1,553 20.7 5 153 51 1,445 57 1,388 18.5 426 29.5 962 12.8

% chg 10.8 5.2 21.4 13.0 9.1 17.6 420.5 80.8 24.4 9.7 11.9 13.7 11.1

Exhibit 2: 1QCY2013 Actual vs Angel estimates

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

Actual 2,248 533 23.7 279

Angel Est. 2240 504 22.5 292

% Diff. 0.4 5.7 119bp (4.4)

May 17, 2013

Nestle India | 1QCY2013 Result Update

Top-line growth moderate at 9.8% yoy

Nestle posted a 9.8% yoy growth in its top-line to `2,248cr, which was in-line with estimates. Domestic sales grew at an unimpressive 7.7% yoy, with growth arising largely due to better realization and superior product mix. However, exports (contributing a meager 6% to overall sales) posted a 50.8% yoy growth.

Exhibit 3: Top-line growth

2,500 2,000 1,500 1,000 25.0 20.0 15.0 10.0 ( %)
( %)

(` cr)

1,963

2,153

1,810

1,763

1,955

2,047

1,987

2,116

2,248 1Q13

500

5.0 -

3Q11

Top-line (LHS)
Source: Company, Angel Research

yoy growth (RHS)

OPM increases yoy, aided by higher gross margin

Gross margin improved by 65bp yoy despite increase in prices of raw materials like milk, sugar etc, due to better realization and superior product mix. OPM expanded by 136bp yoy on account of expansion in gross margin and a marginal yoy reduction in proportion of other expenses to sales. Thus, operating profit rose by 16.5% yoy. During the quarter, the companys depreciation cost was higher by 55.6% yoy on account of the capacity addition undertaken by the company. The companys interest costs too rose on account of loans taken by the company for capacity expansion. During the quarter, the company also charged `20.7cr towards provision for contingencies due to change in certain regulatory procedures.

Exhibit 4: Gross Margin and OPM expand yoy

60.0 50.0 40.0 30.0 20.0 10.0 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 21.3 19.5 20.9 21.1 22.3 21.6 21.0 22.3 23.7 51.2 50.5 51.8 54.6 54.2 54.6 54.1 55.2 54.8

Exhibit 5: Net Profit flat yoy

310 260 210 (` cr) 160 110 30.0 25.0 20.0 15.0 10.0

(%)

246

256

214

261

231

276

267

279

10

279 1Q13

60

4Q12

1Q11

2Q11

4Q11

1Q12

2Q12

3Q12

5.0 -

2Q12

1Q11

2Q11

3Q11

4Q11

1Q12

3Q12

OPM

Gross margin

PAT (LHS)

yoy growth (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

4Q12

May 17, 2013

Nestle India | 1QCY2013 Result Update

Investment Rationale
Stiff competition exerting pressure on volume growth: Nestle is one of Indias largest companies in the foods and beverages space through its diversified portfolio of established brands such as Maggi, Nescafe, Everyday, Kit Kat and Milkmaid. Of late, competition has intensified in the product categories the company has presence in from companies such as ITC, GSK Consumer etc. This resulted in a moderate single digit volume growth for the company in CY2012. The company has tried to address this issue by investing in new capacities to increase volume growth.

Outlook and valuation

We expect Nestle to post a top-line and bottom-line CAGR of 14.9% and 16.2% over CY2012-14. At the current market price, Nestle is trading at rich valuations of 32.2x CY2014E EPS. Hence, we continue to maintain our Neutral view on the stock.

Exhibit 6: One-year forward PE

50.0 45.0 40.0 (x) 35.0 30.0 25.0 20.0 15.0 May-08 Apr-11 Nov-10 Nov-12 Aug-09 Oct-08 Mar-09 Sep-11 Apr-13 Jan-10 Jan-12 Jun-10 Jun-12

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

May 17, 2013

Nestle India | 1QCY2013 Result Update

Exhibit 7: Peer valuation

Company Asian Paints Britannia Colgate Dabur India Godrej Con GSK Con* HUL ITC Marico Nestle* TGBL Reco. Neutral Acc. Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Mcap (` cr) 46,131 6,820 20,221 27,376 29,633 21,423 126,690 261,682 14,310 47,920 9,072 CMP (`) 4,809 571 1,487 157 871 5,094 586 335 222 4,970 147 TP (`) Upside (%) P/E (x) FY14E 34.0 28.2 33.2 29.3 34.6 41.7 34.3 30.2 30.6 39.0 18.6 FY15E 29.6 22.7 28.7 25.0 29.3 34.3 31.8 25.8 25.6 32.2 16.9 EV/Sales (x) FY14E 3.6 0.9 5.4 3.7 3.9 5.4 4.2 7.4 2.8 5.0 1.0 FY15E 2.9 0.7 4.6 3.1 3.2 4.3 3.6 6.0 2.5 4.2 0.5 RoE (%) FY14E 35.4 37.4 98.3 41.5 24.8 34.1 113.4 35.5 21.4 57.7 9.5 FY15E 32.2 37.3 88.0 40.1 24.2 33.7 87.0 34.1 21.0 50.7 9.8 CAGR Sales 15.4 15.5 15.1 16.5 18.8 17.6 14.7 15.3 14.8 14.9 10.0
#

PAT 18.4 22.0 17.4 19.5 18.9 19.6 11.7 16.6 24.0 16.2 13.0

Source: Company, Angel Research; Note: #denotes CAGR for FY2013-15E;*December Year Ending

Exhibit 8: Angel vs. Consensus estimates

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

CY2013E

CY2014E

EPS (`) Angel estimates Consensus Diff (%)

CY2013E

CY2014E

9,447 9,490 (0.5)

10,968 11,111 (1.3)

127.5 127.0 0.4

154.1 151.7 1.6

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 comprises of milk products and nutrition (~49% of sales), prepared dishes and cooking aids (~28%), chocolates and confectionery (~13%) and beverages (~10%). 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.

May 17, 2013

Nestle India | 1QCY2013 Result Update

Profit & Loss Statement

Y/E Dec. (` cr) 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 CY09 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 6,255 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 7,491 19.8 5,958 3,609 328 546 1,475 1,533 22.7 20.5 153 1,380 23.0 18.4 5 51 3.6 1,426 22.5 57 1,368 426 29.9 942 942 999 19.4 13.3 97.7 97.7 15.0 CY12 8,302 10.8 6,476 3,776 356 663 1,681 1,826 19.1 22.0 277 1,549 12.2 18.7 27 63 4.0 1,585 11.2 33 1,553 485 30.6 1,068 1,068 1,101 10.2 13.3 110.8 110.8 13.4 CY13E 9,447 13.8 7,359 4,288 453 737 1,880 2,088 14.4 22.1 358 1,730 11.7 18.3 24 76 4.2 1,781 12.4 0 1,781 552 31.0 1,229 1,229 1,229 11.7 13.0 127.5 127.5 15.1 CY14E 10,968 16.1 8,527 4,963 526 855 2,183 2,440 16.9 22.3 362 2,078 20.1 18.9 18 93 4.3 2,154 20.9 0 2,154 668 31.0 1,486 1,486 1,486 20.9 13.5 154.1 154.1 20.9

May 17, 2013

Nestle India | 1QCY2013 Result Update

Balance Sheet
Y/E Dec. (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Long term provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loans and adv. Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets 857 156 138 563 1,422 (566) 613 1,046 255 151 639 1,670 (624) 889 1,641 745 896 80 203 1,855 842 1,013 349 151 2,552 976 1,576 1,419 134 164 1,109 227 196 686 1,228 (119) 3,173 4,428 1,223 3,204 344 365 125 1,125 237 181 708 1,128 (3) 4,036 4,478 1,581 2,896 672 565 125 1,423 241 274 908 1,233 190 4,448 4,528 1,944 2,584 679 1,365 125 1,870 478 318 1,074 1,487 384 5,137 613 889 96 485 581 32 96 759 855 33 96 1,178 1,274 971 43 885 3,173 96 1,702 1,798 1,050 162 1,025 4,036 96 2,364 2,461 800 162 1,025 4,448 96 3,303 3,400 550 162 1,025 5,137 CY09 CY10 CY11 CY12 CY13E CY14E

May 17, 2013

Nestle India | 1QCY2013 Result Update

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 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 1,368 153 125 (22) 426 75 1,273 (1,767) 16 (1,751) 971 543 (22) 450 (28) 255 227 CY12 1,553 277 71 (4) 485 89 1,501 (801) (230) (1,031) 79 543 (4) (460) 10 227 237 CY13E 1,781 358 (189) (9) 552 (20) 1,370 (378) (200) (578) (250) 547 (9) (789) 4 237 241 CY14E 2,154 362 43 (35) 668 1,857 (58) (800) (858) (250) 547 (35) (762) 237 241 478

May 17, 2013

Nestle India | 1QCY2013 Result Update

Key Ratios
Y/E Dec. 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 35 5 42 (7) 3 34 4 44 (7) 3 36 6 49 (7) 3 35 5 48 (7) 3 35 5 44 (10) 3 35 5 44 (11) 164.3 250.4 124.2 149.4 219.0 114.0 86.9 80.3 88.5 58.5 49.6 69.5 53.8 47.5 57.7 55.2 58.7 50.7 67.9 67.9 79.5 48.5 60.3 84.9 84.9 98.2 48.5 88.7 97.7 97.7 113.6 48.5 132.1 110.8 110.8 139.5 48.5 186.5 127.5 127.5 164.6 48.5 255.2 154.1 154.1 191.7 48.5 352.6 73.2 62.5 82.4 1.0 9.2 45.9 77.4 58.5 50.6 56.0 1.0 7.5 37.7 53.1 50.9 43.8 37.6 1.0 6.3 30.7 20.6 44.9 35.6 26.6 1.0 5.8 26.3 16.0 39.0 30.2 19.5 1.0 5.0 22.6 13.8 32.2 25.9 14.1 1.0 4.2 18.8 11.2 CY09 CY10 CY11 CY12 CY13E CY14E

May 17, 2013

Nestle India | 1QCY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

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%)

May 17, 2013

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