'Nestle India likely to under perform other FMCG companies'

MUMBAI: Nestle India is likely to under perform the FMCG companies in the coming quarters as the current valuation does not factor in the slowing growth.

The growth in Nestle India's key categories - Noodles and Chocolates has slowed down over the past few quarters. In the first half of CY12, the packaged food sales grew by 13% as compared to 22% over C06-C11. While a part of this can be attributed to the macro slowdown, and partly due to the reduced focus on the low end products. This along with the recent sharp price hikes indicates the company's excessive focus on the profitability even at the cost of volumes. Besides this the company is lagging behind the competition in the categories such as chocolates and beverages. The company's sales growth for the next two years is likely to come down to around 15% from 22% over the last five years.

Increased advertisement spends due to competition, higher depreciation due to recent capital expenditure and higher increased interest cost will also keep the profitability under pressure.

Considering all this, the current valuation of price to earning 36 is not justified and the company's stock is likely to under perform in the coming quarters.