Nestle India: Smell the coffee

Last Updated: Thu, Aug 05, 2010 20:31 hrs

The stock trades at a premium to the Sensex due to superior branding and innovative product strategies.

The results of Nestle India were more or less in line with expectations. However, the outlook on the share price is not the same, it’s a tad low. According to analysts, the company’s share price trades at a premium of around 120 per cent to the Sensex due to its superior branding and product strategies. Five-year average premium is also 80 per cent to the Sensex, hence, 120 per cent looks a tad expensive for this fast moving consumer goods (FMCG) major.

The company’s revenues have grown 21 per cent year-on-year, while net earnings have also risen at a similar rate. Operations at Pantnagar ( a 58-basis-point drop) and the tax cover helped on lower tax outflow, which helped in earnings to grow. But, operating profits remained muted due to to rising input costs.

The management has been proactive to beat competition in the noodles segment. It has launched two new variants in Maggi – tricky tomato and thrillin curry. Also, the introduction of hot and sweet Maggi Pichkoo is also expected to be positive. Hindustan Unilever and Glaxo Smithkline have been penetrating the noodle market that Maggi rules. However, its distribution reach and cheaper units, which contribute 30 per cent to its sales, have been aiding strong double-digit growth in smaller towns, according to analysts. But there are concerns over the cost. The company gets affected by rise in prices of key inputs like sugar and milk. These would be watched by analysts as the monsoon unfolds.

As revenues in the milk-food steady out, analysts expect the prepared foods business to grow more than 20 per cent in the current financial year and support revenue growth. If this happens, the premium valuations will be held.

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