Nestlé India –Sell- Anand Rathi
We expect current premium valuations to weigh on Nestlé’s stock price and reiterate SELL with a revised target price of Rs2,003. Over the last 10 years, the stock has traded at an average 65% premium to the Nifty.
With lower earnings growth, we expect the current 100% premium to the Nifty to shrink in coming quarters. The stock trades at a PE of 32.8x CY10e earnings against an average 12-month forward PE of 24x.
Most raw material prices have risen over 20%. Rising food prices cut into the wallet share for consumer products as well as hit margins of food companies such as Nestlé. The 200bps increase in excise erodes realizations and the 5% increase in customs duty on crude oil would impact packaging and transportation costs.
We raise CY10 and CY11 revenue estimates 3.1% and 4.7%, respectively. We expect EBITDA margin to fall 40bps in CY10 due to higher excise and raw material costs. However, due to a lower tax rate, we raise CY10e and CY11e earnings 5.5% and 5.6%, respectively.
We value Nestlé at Rs2,003 (earlier Rs1,520) at a target PE of 25x CY10e earnings. Our target PE is at a 65% premium to the Nifty (the average premium over the past 10 years), whereas the present premium is 100%.
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