Nomura puts 'buy' on Nestle India

RESEARCH: NOMURA

RATING: BUY

CMP: Rs 286.9

Nomura upgrades the rating on Nestle India to `Buy’ from `Reduce’ with a target price of Rs 320. The stock has significantly underperformed so far this year largely on account of concerns surrounding higher input prices and increased competition. This has also been the primary catalyst for the street downgrading estimates.

With the input cycle turning in their favour, operating margins are likely to expand significantly. The analysis suggests that for every 1% decline in prices of key inputs, margins improve 25 bps and PAT improves 1.3%. From a long-term perspective, premium valuations are justified given that Nestle offers an excellent play on urban consumption. The company operates in the fast growing, yet underpenetrated processed food opportunity in India and hence, sustainability of earnings is significantly higher than other consumer names. The recent weakness is an excellent opportunity to enter the stock.