Nestlé India, FDA, NASVI to promote food safety practices among street food vendors

Nestlé India’s net sales, EBITDA and net profit surged by 35% yoy, 67% yoy & 116% yoy to Rs23.5bn, Rs4.5bn & Rs2.7bn, respectively in 3QCY16. This growth is largely attributable to lower base effect due to ban on Maggi in the previous year, while growth – excluding Maggi – is likely to be in lower single digit. While we expect Nestlé to see 14.9% & 17.8% CAGR in revenue and earnings through CY16-18E, the valuations at 41.7x CY18E earnings are prohibitive, in our view. As we believe that there are better opportunities in the FMCG space at inexpensive valuations, we maintain our REDUCE recommendation on the stock with an upwardly revised Target Price of Rs5,974 (from Rs5,823 earlier).

Poor Operating Performance vs. 3QCY14

As the Company’s 3QCY15 performance was impacted due to ban in Maggi, we believe that it is sensible to compare 3QCY16 numbers with those of 3QCY14, which was a normal quarter. Revenue, EBITDA & PAT declined by 8%, 16% & 13% vis-à-vis 3QCY14. EBITDA margins fell by 160bps to 19.1% in 3QCY16 from 20.7% in 3QCY14.

Improved Thrust on New Products

Over the past two quarters, Nestlé has introduced more than 25 new products and variants in the Indian market, which are anticipated to propel volume growth, going forward. Following attainment of a clear market leadership in instant noodles space, Nestlé has launched Maggi Hot Heads range that is expected to drive growth in value-added segment

Outlook & Valuation

Nestlé India’s performance in CY15 was impacted due to ban on Maggi, but notably the performance of its ex-Maggi portfolio has not been that encouraging. Introducing our estimates for CY18E, we expect Nestlé to report revenues of Rs110.3bn & Rs126.9bn and net profit of Rs13.6bn & Rs15.7bn in CY17E & CY18E, respectively.

Based on expected CY18E EPS of Rs162.7, the stock currently trades at P/E multiple of 41.7x CY18E earnings. Nestle’s multiples are extremely rich and we believe that there are better investment opportunities in the FMCG sector at inexpensive valuations. We reiterate our REDUCE recommendation on the stock with an upwardly revised Target Price of Rs5,974 (from Rs5,823 earlier).

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