Nestle | 2QCY2011 Result Update

July 30, 2011

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

REDUCE
CMP Target Price
2QCY10 1,467 294 20.0 195 % yoy 20.2 17.2 (50bp) 9.8 Angel est. 1,725 361 21.0 243 % Diff 2.2 (4.7) (141bp) (11.9)

`4,349 `3,483
12 Months

2QCY11 1,763 344 19.5 214

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

FMCG 41,935 0.4 4,517/2,720 10,025 10 18,197 5,482 NEST.BO

For 2QCY2011, Nestle reported a mixed performance, beating our revenue expectations upwards by ~2% and earnings estimates downwards by ~12%. The companys top line grew by 20.2% yoy, while earnings grew by disappointing ~10% yoy (against our expectation of ~24% yoy growth). Operating margin for the quarter contracted due to raw-material price inflation. We maintain our Reduce view on the stock. Key highlights during the quarter: Top-line growth during the quarter was driven by value and volume growth. The companys export sales growth stood at 11% yoy, whereas domestic sales growth stood at 21% yoy. Nestle faced raw-material price inflation pressure in milk solids, green coffee and oils and fats, which resulted in a 42bp yoy contraction in gross margin. Earnings grew by modest ~10%, impacted by high tax rate as the companys Pantnagar plants 100% income tax holiday reduced to 30% as it completed five years of operation. Outlook and valuation: At the CMP, Nestle is trading at ~180% premium to the Sensex, significantly ahead of its five-year average historical premium at ~76%. We render caution on Nestles high premium to the Sensex on account of 1) gross margin pressures due to rising input costs and 2) competition in the high-growth noodles category from HUL (Knorr soupy noodles), GSKCHL (Horlicks Foodles) and ITC (Sunfeast Yipee). Hence, we maintain our Reduce view on the stock with a revised target price of `3,483.

NEST@IN

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 62.9 6.7 26.3 4.1

Abs. (%) Sensex Nestle

3m (5.7) 8.6

1yr 1.1 46.8

3yr 31.9 141

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

CY2009 5,129 18.6 655 22.6 20.2 67.9 64.0 72.1 124.2 164.3 8.1 40.4

CY2010 6,255 21.9 819 25.0 20.0 84.9 51.2 49.0 114.0 149.4 6.7 33.4

CY2011E 7,277 16.3 974 18.9 20.1 101.0 43.1 32.7 91.1 120.4 5.7 28.1

CY2012E 8,435 15.9 1,158 18.9 20.7 120.1 36.2 22.2 72.9 97.6 4.9 23.3

Sreekanth P.V.S
022 3935 7800 Ext: 6841

sreekanth.s@angelbroking.com

Please refer to important disclosures at the end of this report

Nestle | 2QCY2011 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 (`) 2QCY11 1,763.1 871.8 49.5 137.5 7.8 409.2 23.2 1,418.6 344.5 19.5 0.6 36.7 8.0 315.2 5.8 309.4 17.6 95.6 30.3 213.8 12.1 219.6 9.6 22.2 2QCY10 1,466.7 719.1 49.0 111.6 7.6 342.0 23.3 1,172.8 294.0 20.0 0.4 30.4 10.1 273.3 6.7 266.7 18.2 71.8 26.3 194.8 13.3 201.5 9.6 20.2 % chg 20.2 21.2 23.2 19.6 21.0 17.2 1HCY11 6,254.8 3,055.6 48.9 433.4 6.9 1,516.1 24.2 5,005.1 1,249.7 20.0 1.1 127.8 42.7 1,163.5 18.4 1,145.1 18.3 326.5 28.1 818.7 13.1 837.0 9.6 84.9 1HCY10 5,129.4 2,448.4 47.7 432.4 8.4 1,214.2 23.7 4,095.0 1,034.4 20.2 1.4 111.3 37.9 959.6 42.6 917.0 17.9 262.0 27.3 655.0 12.8 697.6 9.6 67.9 % chg 21.9 24.8 0.2 24.9 22.2 20.8 (23.6) 14.8 12.6 21.2 24.9 24.6 25.0 20.0

20.7 (21.1) 15.3 (13.2) 16.0 33.1 9.8 9.0 9.8

Source: Company, Angel Research

Steady double-digit top line aided by value and volume growth

Nestle registered robust top-line growth of 20.2% yoy to `1,763cr (`1,467cr), marginally ahead of our estimates, driven by steady growth in its net domestic sales (up 21% yoy to `1,643cr, supported by volume growth and higher realisations across categories). Exports also registered 11% yoy growth to `120cr.

Exhibit 2: Double-digit top-line growth continues...

2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

30.0 25.0 20.0 15.0 10.0 5.0 ( %)

(` cr)

Top-line (LHS)

yoy growth (RHS)

Source: Company, Angel research

July 29, 2011

Nestle | 2QCY2011 Result Update

High raw-material costs pull down margins Higher tax rate drags earnings
Nestles earnings (on a reported basis) registered 9.8% yoy growth to `214cr (`195cr), aided by margin contraction and higher tax rate. Gross margin for the quarter contracted by 42bp, as the company witnessed raw-material price inflation pressure in milk solids, green coffee and oils and fats. OPM for the quarter declined by 50bp because of raw-material price inflation and a marginal increase in staff costs (up 19bp yoy). The companys earnings growth was impacted by its Pantnagar plants 100% income tax holiday reducing to 30% as it completed five years of operation.

Exhibit 3: Earnings growth subdued by high tax rate...

310 260 210 100.0 50.0 (50.0) (100.0) (150.0) (200.0) (250.0) (300.0)

Exhibit 4: Gross margin and OPM decline yoy...

60.0 50.0 40.0 30.0
(%)

52.4 52.2 51.8 50.2 51.0 50.9 52.4 51.2 50.5

(`cr)

( %)

160 110 60 10

21.6 20.3

20.0 10.0 2Q09 3Q09

14.7

20.5 20.0 19.7 19.7 21.3 19.5

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

PAT (LHS)

yoy growth (RHS)

OPM

Gross margin

Source: Company, Angel research

Source: Company, Angel research

July 29, 2011

2Q11

Nestle | 2QCY2011 Result Update

Investment concerns
Key raw-material prices to continue pressurising margins: Nestle has reported an operating margin contraction on a yoy basis. While we do not expect raw-material prices of key commodities such as milk, sugar and wheat flour to show a steep increase from the current level on account of the onset of normal monsoons (according IMD forecast, June 2011), we do expect prices of these commodities to remain firm. However, valuations at 180% premium to the Sensex capture full potential: At the CMP, Nestle is trading at ~180% premium to the Sensex, significantly ahead of its five-year average historical premium at ~76%. While Nestle has been able to maintain these premium valuations because of its strong parentage, dominant brands, high RoE and OPM, we believe current valuations capture full potential of near-term growth. We remain cautious in terms of Nestle being able to maintain this triple-digit premium to the Sensex on account of gross margin pressures due to rising input costs and competition in the high-growth noodles category from HUL, GSKCHL and ITC.

Outlook and valuation

Post 1QCY2011 results, we maintain our revenue and earnings estimates. At the CMP, Nestle is trading at ~180% premium to the Sensex, significantly ahead of its five-year average historical premium at ~76%. We render caution on Nestles high premium to the Sensex on account of 1) gross margin pressures due to rising input costs and 2) competition in the high-growth noodles category from HUL, GSKCHL and ITC. Hence, we maintain our Reduce view on the stock with a revised target price of `3,483.

July 29, 2011

Nestle | 2QCY2011 Result Update

Exhibit 5: Key assumptions

Sales (` cr) Total Milk Products Beverages Prepared Dishes & Cooking Aids Chocolates & Confectionaries Total Gross Revenue YoY % Growth Total Milk Products Beverages Prepared Dishes & Cooking Aids Chocolates & Confectionaries Total Revenue Volume Growth % Total Milk Products Beverages Prepared Dishes & Cooking Aids Chocolates & Confectionaries Total Gross Revenue Realisation Growth % Total Milk Products Beverages Prepared Dishes & Cooking Aids Chocolates & Confectionaries
Source: Company, Angel research

CY08 1,939 801 1,052 680 4,471

CY09 2,311 804 1,335 772 5,222

CY10 2,776 899 1,725 976 6,377

CY11E 3,095 1,022 2,132 1,176 7,426

CY12E 3,448 1,157 2,613 1,389 8,607

CY09-12E 14.3 12.9 25.1 21.6 18.1

23.1 10.9 34.7 19.5 22.6

19.2 0.4 26.9 13.6 16.8

20.1 11.8 29.2 26.4 22.1

11.5 13.7 23.6 20.5 16.5

11.4 13.2 22.6 18.1 15.9

10.1 0.0 30.1 12.4 16.9

13.1 (3.1) 21.7 9.7 14.9

7.6 13.2 24.4 21.2 17.0

7.2 12.0 20.0 17.0 14.7

7.1 11.5 19.0 14.6 17.0

11.7 10.9 3.5 6.3

5.4 3.6 4.3 3.5

11.6 (1.2) 3.9 4.3

4.0 1.5 3.0 3.0

11.6 (1.2) 3.9 4.3

July 29, 2011

Nestle | 2QCY2011 Result Update

Exhibit 6: Peer valuation

Company Asian Paints Britannia Colgate Dabur GSKCHL GCPL HUL ITC Marico Nestle Reco. Neutral Neutral Reduce Accumulate Reduce Accumulate Neutral Neutral Neutral Reduce Mcap (` cr) 29,983 5,758 13,217 18,147 10,143 14,099 70,676 161,185 10,279 41,935 CMP (`) 3,126 482 972 104 2,412 436 324 208 167 4,349 TP (`) 869 115 2,163 478 3,483 Upside (%) (11) 10 (10) 10 (20) P/E (x) FY12E FY13E 30.5 31.3 30.1 25.9 29.2 24.1 27.7 27.8 31.6 43.1 24.8 21.4 25.7 22.6 24.5 21.0 24.2 23.4 25.3 36.2 EV/Sales (x) FY12E FY13E 3.2 1.1 5.0 3.6 3.4 3.6 3.0 6.2 3.0 5.7 2.7 1.0 4.3 3.1 2.8 3.2 2.7 5.2 2.6 4.9 RoE (%) FY12E FY13E 39.6 37.8 111.7 44.9 32.6 38.7 74.9 32.7 31.5 91.1 38.3 46.1 108.0 41.6 31.8 28.0 74.7 31.5 29.5 72.9 CAGR Sales PAT 17.3 17.3 14.9 20.5 17.3 13.4 12.7 17.6 15.7 16.1 19.8 36.0 12.9 18.8 17.5 18.2 17.2 17.4 30.8 18.9

Source: Company, Angel Research

Exhibit 7: Angel vs. Consensus estimates

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

FY2012E

FY2013E

EPS (`) Angel estimates Consensus Diff (%)

FY2012E

FY2013E

7,277 7,495 (2.9)

8,435 9,018 (6.5)

101.0 93.5 8.0

120.1 121.0 (0.8)

Exhibit 8: Absolute returns of Nestle vs. Sensex

200% 180% 160% 140% 120% 100% 80%
Sensex Nestle

Exhibit 9: One-year forward P/E band

6,000 5,000
20x 26x 32x 40x

Share Price (`)

4,000 3,000 2,000 1,000 -

Dec-05

Dec-07

Dec-09

Apr-05

Apr-07

Apr-09

Aug-06

Aug-08

Oct-10

Nov-10

Feb-11

Sep-10

May-11

Aug-10

Dec-10

Jan-11

Apr-11

Jun-11

Mar-11

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 10: One-yr forward P/E chart

45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 -

Exhibit 11: One-yr forward Premium v/s Sensex chart

200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0%

Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11

Source: Company, Angel Research

Source: Company, Angel Research

July 29, 2011

Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

Aug-10

Jul-10

Jul-11

Apr-11

Nestle | 2QCY2011 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 Expense/(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 (Rs) % chg CY07 3,647 143 3,504 3,504 24.4 2,808 1,685 172 263 688 696 28.6 19.9 75 622 30.8 17.7 1 25 3.9 646 30.4 18 629 215 33.2 414 414 431 30.7 12.3 42.9 42.9 31.3 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 4.2 804 24.4 31 773 239 29.7 534 534 565 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 CY11E 7,426 149 7,277 7,277 16.3 5,811 3,563 364 509 1,375 1,466 17.3 20.1 139 1,327 18.3 18.2 1 47 3.4 1,373 18.0 15 1,358 384 28.0 974 974 989 18.1 13.6 101.0 101.0 18.9 CY12E 8,607 172 8,435 8,435 15.9 6,691 4,077 422 590 1,603 1,743 18.9 20.7 161 1,582 19.2 18.8 1 55 3.4 1,636 19.1 20 1,616 458 28.0 1,158 1,158 1,178 19.1 14.0 120.1 120.1 18.9

July 29, 2011

Nestle | 2QCY2011 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 1,180 578 602 74 94 638 38 145 455 958 (320) 450 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 2,140 981 1,159 107 151 1,747 815 167 765 1,849 (102) 1,315 2,481 1,142 1,338 124 151 2,385 1,301 194 890 2,072 313 1,926 96 322 418 3 29 450 96 377 473 37 510 96 485 581 32 613 96 759 855 33 889 96 1,185 1,282 33 1,315 96 1,796 1,893 33 1,926 CY07 CY08 CY09 CY10 CY11E CY12E

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 CY07 629 75 8 (4) 215 22 514 (157) (17) (174) (13) 370 (4) (379) (39) 76 38 CY08 773 92 84 (13) 239 21 719 (261) 60 (201) (3) 372 (13) (362) 156 38 194 CY09 917 111 131 (13) 262 (14) 871 (206) (168) (375) 547 (13) (534) (38) 194 156 CY10 1,145 128 140 (18) 326 (11) 1,057 (483) 53 (431) 545 (18) (527) 100 156 255 CY11E 1,358 139 31 (17) 384 7 1,134 (44) (44) 547 (17) (530) 560 255 815 CY12E 1,616 161 71 (18) 458 1 1,372 (357) (357) 547 (18) (529) 486 815 1,301

July 29, 2011

Nestle | 2QCY2011 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 42 6 48 (10) 3 37 4 43 (7) 3 35 5 42 (7) 3 34 4 44 (7) 3 34 5 43 (8) 3 34 5 42 (9) 142.2 141.1 102.5 160.7 180.9 119.8 164.3 250.4 124.2 149.4 219.0 114.0 120.4 229.6 91.1 97.6 276.5 72.9 42.9 42.9 50.7 33.0 43.4 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 88.7 101.0 101.0 115.4 48.5 132.9 120.1 120.1 136.8 48.5 196.3 101.3 85.8 100.2 0.8 11.9 60.2 93.1 78.5 66.9 88.6 1.0 9.6 48.3 81.8 64.0 54.7 72.1 1.1 8.1 40.4 68.1 51.2 44.3 49.0 1.1 6.7 33.4 46.9 43.1 37.7 32.7 1.1 5.7 28.1 31.3 36.2 31.8 22.2 1.1 4.9 23.3 21.1 CY07 CY08 CY09 CY10 CY11E CY12E

July 29, 2011

Nestle | 2QCY2011 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

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 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%)

July 29, 2011

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