This consumer stock is scripting a turnaround; should you buy in?

NEW DELHI: Nestle India today scaled a lifetime high on the BSE after foreign brokerages Goldman Sachs and CLSA raised its target price.

Global investment bank Goldman Sachs has upped the company's 2018-20 EPS (earnings per share) estimate by 3-5 per cent. It has raised the target price to Rs 7,354, from Rs 6,786 earlier, and maintained 'neutral' rating on the stock, which hit a record high of Rs 8,950.

As per the GS estimate, Nestle India's average domestic sales would grow at 15 per cent over 2018-20, driven by demand for new products like Greek yogurts and brand extensions under the Milkmaid brand.


Nestle’s overall volumes, a report by Kotak Securities said, grew 11 per cent yoy in 2017 as Maggi turnaround story continued and other segments returned to positive volume growth territory. This was the first time since 2010 that volumes grew across segments even as the figures remained below the 2011 levels.

The company's stock soared 91.35 per cent in the past 5 years while it surged 41.06 per cent in the last 12 months.

The consumer firm has not completely reversed the volume damage caused by its excessive margin focus during 2010-16 and the Maggi crisis, the report stated.

"Even as absolute volumes for each of the four business segments -- milk products and nutrition, beverages, prepared dishes and cooking aids and chocolate and confectionery -- still remain below 2011 levels, we see the 2017 volume print as an encouraging sign of revival led by early success of the new management’s interventions," the brokerage said in its report.

Nestle reported net revenue growth of 9.7 per cent yoy for 2017, with domestic space growing 10.3 per cent and export accounting for 0.9 per cent. The company estimates an adjusted comparable revenue growth of 11.8 per cent, according to the annual report.

Ebitda growth of 10.1 per cent yoy came in line with revenue growth as the company pursued a volume-centric strategy that led to gross margin erosion in the first half of 2017.

PAT grew by 21.1 per cent at a faster pace than operating profit growth on the back of lower provision for contingencies and lower effective tax rates (ETR) at 33.4 per cent versus 35 per cent in 2016.

Brokerage firm CLSA said strong growth in earnings along with reduction in working capital drove free cash flow growth of 20 per cent yoy in 2017. It has raised the target price to Rs 9,750 from Rs 8,950, but downgraded the stock to 'outperform' from 'buy', citing a 13 per cent surge in the past one month.

Nestle trades at 54x one-year forward PE, which CLSA said should sustain in the context of 19 per cent EPS compound annual growth rate (CAGR). CAGR is measure of how much a person’s investment grew in one year. In other words, it is average returns an investor has earned on the investments after one year.

Of 32 analysts covering the stock, 22 have a buy or higher rating, 6 hold, while 4 sell or lower ratings with a median target price of Rs 8,650, showed Reuters data.

The stock has risen over 27 per cent in nearly 10 weeks up to Monday after it hit a multi-month low on February 8. The Nifty FMCG index advanced 2 per cent during the same period.