Brokerages lower Nestle India’s target price on disappointing results

MUMBAI: After Nestle India’s disappointing quarterly results, brokerages have lowered their target price as they expect margins to remain under pressure in coming quarters.

In its commentary, management said “economic environment remains unchanged and we expect the current pressure to continue in particular on input costs.”

The company reported a net profit of Rs 281.66 crore in the quarter ended December 2013, up 0.98 per cent, against a net profit of Rs 278.92 crore in the corresponding quarter last fiscal. Sales rose to Rs 2,252.30 crore, up 4.63 per cent, from Rs 2152.65 crore in year-ago period.

“Nestle India’s Q4CY13 operational performance was significantly below our and street expectations, led by a sharp moderation in top-line growth to 5 per cent y/y and lower margins. EBITDA and PBT declined 6 per cent and -1 per cent, respectively as gross margins were lower y/y,” said JP Morgan report.

According to the brokerage, Nestle’s gross margins declined -180bp y/y, impacted by high RM inflation despite better pricing and improved mix. Significant inflation in milk prices, employee costs and other expenses weighed on EBITDA margins further, which declined -240bp y/y.


“Given sluggish growth trends witnessed in Q4 and likely pressure on volume/margins in the near term, we lower our CY14E Sales/EPS estimates by 4/9 per cent,” the brokerage said.

JP Morgan has maintained ‘Neutral’ rating on the stock and revised its target price lower to Rs 4,700 from Rs 5,175 earlier.

Nestle’s enhanced focus on premium product portfolio in the current macro environment has surprised analysts at HDFC Securities.

“We believe that the ill timed move will not just hurt revenues in CY14 (flat volumes for the last eight quarters) but also impact market share. Also, price hike (5-8 per cent) initiated by the company across product portfolio would further hurt volume growth. Furthermore, Nestle appear vulnerable in near term as its entire product portfolio faces severe competitive pressure,” the report said.

The brokerage has retained ‘SELL’ recommendation on the stock and lowered its price target to Rs 4,500 from Rs 4,850 earlier.

The results are below Nomura’s estimates on both topline and bottomline front.

“The big negative surprise was the 180bps decline in gross margins vs. our expectation of a 10bps decline. EBITDA margins decline was sharper at 230bps y-y on account of higher overhead expenses,” the brokerage said.

The brokerage expects the near-term outlook to remain challenging for the company as revival in topline and margins looks to be at least a couple of quarters away. The brokerage has ‘Neutral’ rating on the stock with a target price of Rs 4,810.

The stock ended at Rs 5026.15, up 0.31 per cent, on the BSE. It touched a high of Rs 5,043.20 and a low of Rs 4,999 in trade today.