MarketWatch- Nestle (India) Ltd.
NESTLE LTD. (Last traded on BSE/NSE: 23/04/99) Courtesy:Equity Master.
Exg. Code Open (Rs) High (Rs) Low (Rs) Close (Rs) Vol. (nos) Value (Rs)
BSE 790 513.0 527.0 512.5 519.0 132,918.0 69,051,008.0
NSE 154 513.0 528.9 511.0 520.0 86,209.0 44,922,948.0
Nestle India Ltd
(By Mohit Gupta)
Nestle India Ltd. (Nestle) is the Indian associate of Nestle S.A., Switzerland, one of the largest food product companies in the world. Nestle started its manufacturing operations in 1962 with Milkmaid and has subsequently expanded its portfolio of branded food products to include coffee, baby food, ketchup, instant noodles, soups, chocolates and confectioneries. Some of its well known brands are Nescafe (instant coffee), Maggi (instant noodles, pickles and ketchup), Milkmaid (condensed milk), Cerelac, Lactogen (both baby cereals), Milo (energy drink), Kitkat (chocolates) etc. which enjoy significant brand equity. Nestle's manufacturing facilities are located at Moga (Punjab), Samalakha (Haryana), Nanjangad (Karnataka), Bicholim and Ponda (both Goa). The company has recently completed an investment of over Rs 3.5 billion in expansion and modernisation of manufacturing facilities. Nestle is the largest procurer and exporter of raw coffee from India besides being the largest exporter of instant coffee. Nestle products are sold in 650,000 outlets in 3,300 towns and are serviced by over 4,000 stockists and distributors.
In India, less than 1% of the food consumption is in the processed form. The dominant players in this industry are small traders. In the organised sector, Nestle, Cadbury's, Hindustan Lever, Britannia and International Bestfoods are dominant. These companies have wide product ranges and extensive distribution networks. Low penetration levels, rising awareness, rapid urbanisation and growth in popularity of branded foods are an indicator of a strong long term demand growth potential. However, this will be constrained by affordability at least in the short run. MNC food companies are expected to target rural markets to increase marketshare. The increased purchasing power of the rural consumer will drive growth in the long run. Government policies have by and large restricted growth in the food sector to small-scale industry (SSIs), though there are indications of a possible shift in policy as can be seen through the latest de-reservation of items from the SSI list. The reduction in excise duties for food products in the Union Budget 1999-2000 will help boost demand.
Nestle's diversified portfolio of products and strength of brands will help it capitalise on the opportunities in this sector. Though Nestle has lost dominance in instant coffee, it is taking steps to reverse the change. This involves a refocusing of attention on its flagship brand Nescafe, which is expected to contribute about 30 percent to the company's turnover. The confectionery business is being consolidated under the brand Allen, the Maggi range of products is being micro-managed to introduce regional flavours to fully service the diverse Indian market. Lactogen is being pushed towards market leadership. Efforts are on to revive coffee exports to Russia by lobbying with the Union government for removal of the five- percent purchase tax and leveraging on its international network to facilitate exports. Nestle has stated its objective of being recognised as a food company instead of a milk and coffee company. Its entry into the ice cream market is seen as inevitable.
With a world-wide restructuring exercise underway, Nestle India is expected to play a key role by becoming the hub of operations for the SAARC region excluding Pakistan. This will increase Nestle India's trading revenue and profitability.
Valuation
Nestle India has exhibited a CAGR of 23% in sales and 21% in profits over the last five years. The RoNW has shown a robust CAGR of 16% in the corresponding period. Though there has been a slowdown in growth in the last year, sustained efforts by the management of the company to focus on its established brands should pay off in the long run. With an active interest shown by the parent, there is a distinct possibility of revival of exports to Russia as well as venturing into new markets. It is in this light that the growth in sales and profits seem sustainable.
Most MNC associates in India operate with very low debt and we expect Nestle gearing to decrease steadily over the next 5 years.
The stock is currently trading at a PER of 65.0x which matches peer valuations. Given the quality of management, successful implementation of its modernisation programme and the refocusing of operations, Nestle will, in all probability, outperform its peers in the short run.
At a conservative estimate of a PER of 51.0x (a 20% discount to its current PER of 65.0x), we estimate long-term growth to be sustained at 22-25% in revenues and profitability, enough to justify a 25% upside to the stock over the medium term. Over the long-term, we expect valuations to move toward Rs.1,100 implying a target compounded appreciation of 40% over the next 24-30 months. As an MNC associate operating in an industry that is not subject to severe cyclical pressures, we recommend Nestle as a prudent investment.
Nestle's got the entire food chain under wraps right from when you have kids to when you wish you hadn't - that's no mean achievement. And everyone remembers those Maggi and Kit Kat ads - great brands. Last, this is one stock where you can actually help the company do well - so stock up.
(Courtesy:Hindustan Times- April.24,1999) |
