4QCY2012 Result Update | FMCG

February 22, 2013

Nestle India
Performance Highlights
Quarterly Performance
(` cr) Revenue EBITDA OPM (%) PAT 4QCY12 2,153 496 23.0 279 4QCY11 1,955 413 21.1 231 % yoy 10.1 20.1 191bp 20.8 3QCY12 2,116 444 21.0 267 % qoq 1.7 11.7 203bp 4.5

NEUTRAL
CMP Target Price
Investment Period

`4,624 -

Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code FMCG 44,582 448 0.4 5040/4306 5,059 10 19,317 5,850 NEST.BO NEST@IN

Source: Company, Angel Research

For 4QCY2012, Nestle India (Nestle) reported a healthy 20.8% yoy growth in its net profit to `279cr, aided by a 191bp yoy expansion in the OPM. However, subdued performance on the top-line front with continued weakness in volumes (estimated to be flat/low single digit during the quarter) remains a cause of concern. Key highlights during the quarter: Domestic sales grew at an unimpressive 9.6% yoy, with growth arising largely due to better realization and superior product mix. However, exports rebounded during the quarter with a 20.6% yoy growth aided by 47.2% yoy increase in sales to third parties. Gross margins improved by 93bp yoy despite increase in prices of raw materials like milk, sugar etc due to better realization and superior product mix. The OPM expanded by 191bp yoy, on account of expansion in gross margin and a marginal yoy reduction in other expenses. Thus, operating profit rose by 20.1% yoy. During the quarter, the companys depreciation cost was higher by 87.3% yoy on account of the capacity addition undertaken by the company. The companys interest costs too rose on account of loans taken by it from promoter group Nestle SA for capacity expansion. Outlook and valuation: We expect Nestle to post a top-line and bottom-line CAGR of 14% and 12.4% over FY2012-14. At the current market price, Nestle is trading at rich valuations of 35.4x CY2013E EPS. Hence, we continue to maintain our Neutral view on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 62.8 7.5 11.4 18.4

Abs. (%) Sensex NEST

3m 4.3 0.2

1yr 6.5 5.9

3yr 19.0 78.5

Key financials
Y/E Dec. (` cr) Net Sales % chg Net Profit (Adj.) % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2010 6,255 21.9 819 25.0 20.0 84.9 54.5 52.1 114.0 149.4 7.0 35.5

CY2011 7,491 19.8 962 17.5 20.7 99.7 46.4 35.0 90.3 88.1 5.8 29.2

CY2012E 8,302 10.8 1,067 11.0 22.0 110.7 41.8 24.8 69.5 58.4 5.3 24.9

CY2013E 9,739 17.3 1,261 18.2 21.5 130.8 35.4 17.8 58.6 58.9 4.4 21.3

V Srinivasan
022-39357800 Ext: 6831 v.srinivasan@angelbroking.com

Please refer to important disclosures at the end of this report

Nestle India | 4QCY2012 Result Update

Exhibit 1: Quarterly Performance

Y/E Dec (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr Items) Extr Income/(Expense) PBT (incl. Extr Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Recurring PAT Equity shares (cr) EPS (`)
Source: Company, Angel Research

4QCY12 2,153 964 44.8 175 8.1 518 24.0 1,657 496 23.0 10 84 21 423 15 408 19.0 129 30.5 279 13.0 294 9.6 29

4QCY11 1,955 894 45.7 146 7.5 502 25.7 1,542 413 21.1 3 45 18 383 37 346 17.7 115 30.0 231 11.8 268 9.6 24

% yoy 10.1 7.9 19.8 3.1 7.5 20.1 199.4 87.3 16.9 10.6 18.1 12.7 20.8 9.7 20.8

3QCY12 2,116 971 45.9 167 7.9 534 25.2 1,672 444 21.0 (8) 74 17 395 8 387 18.3 120 30.3 267 12.6 275 9.6 28

% qoq 1.7 (0.7) 4.8 (3.1) (0.9) 11.7 (223.9) 12.9 24.2 7.2 5.5 7.8 4.5 7.0

CY12 8,302 3,776 45.5 663 8.0 2,037 24.5 6,477 1,826 22.0 27 277 72 1,594 41 1,553 18.7 485 30.4 1,068 12.9 1,109 9.6 111

CY11 7,491 3,589 47.9 546 7.3 1,802 24.1 5,938 1,553 20.7 5 153 51 1,445 57 1,388 18.5 426 29.5 962 12.8 1,019 9.6 100

% chg 10.8 5.2 21.4 13.0 9.1 17.6 420.5 80.8 41.2 10.3 11.9 13.7 11.1 8.9

Exhibit 2: 4QCY2012 Actual vs Angel estimates

(` cr) Revenue EBITDA OPM (%) PAT
Source: Company, Angel Research

Actual 2,153 481 22.3 279

Angel Est. 2,338 470 20.1 292

% Diff. (7.9) 2.3 222bp (4.6)

February 22, 2013

Nestle India | 4QCY2012 Result Update

Top-line growth moderate at 10.1% yoy

Nestle posted a 10.1% yoy growth in its top-line to `2,153cr, which was below our estimates. Domestic sales grew at an unimpressive 9.6% yoy, with growth arising largely due to better realization and superior product mix. However, exports rebounded during the quarter with a 20.6% yoy growth aided by a 47.2% yoy increase in sales to third parties.

Exhibit 3: Top-line growth

2,500 2,000 1,500 2,047 1,963 1,810 1,763 1,955 1,987 2,116 2,153 1,671 1,000 500 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 25.0 20.0 15.0 10.0 5.0 -

(` cr)

Top-line (LHS) Source: Company, Angel Research

yoy growth (RHS)

OPM flat yoy, despite higher gross margin

Gross margin improved by 93bp yoy despite increase in prices of raw materials like milk, sugar etc, due to better realization and superior product mix. OPM expanded by 191bp yoy on account of expansion in gross margin and a marginal yoy reduction in other expenses. Thus, operating profit rose by 20.1% yoy. During the quarter, the companys depreciation cost was higher by 87.3% yoy on account of capacity addition undertaken by the company. The companys interest costs too rose on account of loans taken by it from promoter group Nestle SA for capacity expansion.

Exhibit 4: Gross Margin and OPM expand yoy

60.0 50.0 40.0 52.4 51.2 50.5 51.8 54.6 54.2 54.6 54.1 55.2

Exhibit 5: Net Profit growth at 20.8%

310 260 210 (` cr) 90.0 80.0 70.0 60.0 276 267 279 256 261 246 40.0 30.0 20.0 10.0 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 ( %) 50.0

(%)

30.0 20.0 10.0 -

110 60 10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

203

OPM

Gross margin

PAT (LHS)

214

231

19.7

21.3

19.5

20.9

21.1

22.3

21.6

21.0

22.3

160

yoy growth (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

February 22, 2013

(%)

Nestle India | 4QCY2012 Result Update

Investment Rationale
Stiff competition exerting pressure on volume growth: Nestle is one of Indias largest companies in the foods and beverages space through its diversified portfolio of established brands such as Maggi, Nescafe, Everyday, Kit Kat and Milkmaid. Of late, competition has intensified in the product categories the company has presence in from companies such as ITC, GSK Consumer etc. This resulted in a moderate single digit volume growth for the company in CY2012. The company has tried to address this issue by investing in new capacities to increase volume growth. However, we believe the companys effort to improve volumes would exert pressure on margins.

Outlook and valuation

We expect Nestle to post a top-line and bottom-line CAGR of 14% and 12.4% over FY2012-14. At the current market price, Nestle is trading at a rich valuation of 35.4x CY2013E EPS. Hence, we continue to maintain our Neutral view on the stock.

Exhibit 6: One-year forward PE

50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 May-08 May-09 May-10 May-11 Aug-08 May-12 Nov-08 Aug-09 Nov-09 Aug-10 Nov-10 Aug-11 Feb-08 Nov-11 Aug-12 Feb-09 Nov-12 Feb-10 Feb-11 Feb-12 Feb-13

February 22, 2013

(x)

Source: Bloomberg, Angel Research; Note: Blue line represents 5-yr average

Nestle India | 4QCY2012 Result Update

Exhibit 7: Peer valuation

Company Asian Paints Britannia Colgate Dabur India Godrej Con GSK Con* HUL ITC Marico Nestle* TGBL Reco. Neutral Acc. Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Mcap (` cr) 43,454 5,970 17,903 22,921 25,288 16,352 98,435 228,336 14,196 44,584 8,562 CMP (`) 4,530 500 1,317 132 743 3,888 455 292 220 4,624 138 TP (`) 564 Upside (%) 13 P/E (x) FY13E FY14E 37.1 30.8 27.6 23.0 34.3 29.2 29.2 24.0 35.7 27.4 37.4 31.6 30.2 26.9 31.2 26.3 34.7 28.1 41.8 35.4 20.0 17.0 EV/Sales (x) FY13E FY14E 3.7 3.1 1.0 0.8 5.5 4.8 3.8 3.2 4.2 3.5 4.8 4.1 3.7 3.2 7.5 6.4 3.0 2.6 5.3 4.4 1.1 1.0 RoE (%) FY13E FY14E 37.7 35.7 38.7 38.7 104.6 97.0 44.5 41.4 23.2 25.1 34.9 34.3 84.5 75.8 35.1 35.1 26.3 23.3 69.5 58.6 8.9 9.8 CAGR # Sales PAT 17.6 19.4 13.9 17.8 15.4 17.1 16.6 21.6 26.3 29.9 16.1 20.7 15.5 19.3 17.4 18.7 16.1 25.7 14.0 12.4 10.2 18.8

Source: Company, Angel Research; Note: #denotes CAGR for FY2012-14E;*December Year Ending

Exhibit 8: Angel vs. Consensus estimates

Top-line (` cr) Angel estimates Consensus Diff (%)
Source: Company, Angel Research

CY2013E

EPS (`) Angel estimates Consensus Diff (%)

CY2013E

9,739 9,752 (0.1)

130.8 131.6 (0.6)

February 22, 2013

Nestle India | 4QCY2012 Result Update

Company Background
Nestl India, a 61.9% subsidiary of its global parent Nestl SA, is one of the largest and most diversified food and beverage (F&B) companies in India. The company's product portfolio comprises of milk products and nutrition (~49% of sales), prepared dishes and cooking aids (~28%), chocolates and confectionery (~13%) and beverages (~10%). While Nestl entered the Indian market way back in 1912, when it began as a trading company, its real activity in the country started in 1961 when it set up its first factory at Moga, Punjab, to develop milk.

Profit & Loss Statement

Y/E Dec. (` cr) Total operating income % chg Total Expenditure Cost of Materials Advertising Exp Personnel Others EBITDA % chg (% of Net Sales) Dep. & Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Asso. Recurring PBT % chg Extraordinary Exp./(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earn of asso. Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) FDEPS (`) % chg CY08 4,324 23.4 3,461 2,104 194 307 855 864 24.1 20.0 92 771 24.1 17.8 2 34 4.2 0 804 24.4 31 773 239 29.7 534 0 0 534 565 31.0 13.1 55.4 55.4 29.1 CY09 5,129 18.6 4,095 2,448 268 432 947 1,034 19.8 20.2 111 923 19.7 18.0 1 38 3.9 960 19.4 43 917 262 27.3 655 655 698 23.5 13.6 67.9 67.9 22.6 CY10 6,255 21.9 5,005 3,056 303 433 1,213 1,250 20.8 20.0 128 1,122 21.5 17.9 1 43 3.7 1,163 21.2 18 1,145 326 28.1 819 819 837 20.0 13.4 84.9 84.9 25.0 CY11 7,491 19.8 5,938 3,589 328 546 1,475 1,553 24.3 20.7 153 1,399 24.7 18.7 5 51 3.5 1,445 24.2 57 1,388 426 29.5 962 962 1,019 21.7 13.6 99.7 99.7 17.5 CY12 8,302 10.8 6,477 3,776 399 663 1,682 1,825 17.5 22.0 277 1,548 10.6 18.6 27 63 4.0 1,584 9.6 33 1,552 485 30.6 1,067 1,067 1,100 7.9 13.2 110.7 110.7 11.0 CY13E 9,739 17.3 7,650 4,485 467 760 1,938 2,089 14.5 21.5 300 1,789 15.6 18.4 19 68 3.7 1,839 16.0 26 1,813 552 30.0 1,261 1,261 1,287 17.0 13.2 130.8 130.8 18.2

February 22, 2013

Nestle India | 4QCY2012 Result Update

Balance Sheet
Y/E Dec. (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Long term provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loans and adv. Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets 798 194 124 481 1,185 (387) 510 857 156 138 563 1,422 (566) 613 1,046 255 151 639 1,670 (624) 889 1,405 652 753 109 35 1,641 745 896 80 203 1,855 842 1,013 349 151 2,552 976 1,576 1,419 134 164 1,109 227 196 686 1,228 (119) 3,173 3,452 1,254 2,198 1,350 365 125 1,125 237 181 708 1,128 (3) 4,036 3,746 1,553 2,193 562 965 125 1,653 431 282 940 1,403 250 4,095 510 613 889 96 377 473 37 96 485 581 32 96 759 855 33 96 1,178 1,274 971 43 885 3,173 96 1,702 1,798 1,050 162 1,025 4,036 96 2,412 2,508 400 162 1,025 4,095 CY08 CY09 CY10 CY11 CY12 CY13E

February 22, 2013

Nestle India | 4QCY2012 Result Update

Cash Flow Statement Y/E Dec. (` cr) Profit before tax Depreciation Change in Working Capital Interest / Dividend (Net) Direct taxes paid Others Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Interest / Dividend (Net) Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances CY08 773 92 84 (19) 239 21 713 (261) 60 (201) (3) 372 (19) (356) 156 38 194 CY09 917 111 131 (16) 262 (14) 868 (206) (168) (375) 547 (16) (531) (38) 194 156 CY10 1,145 128 140 (23) 326 (11) 1,052 (483) 53 (431) 545 (23) (522) 100 156 255 CY11 1,388 153 125 (22) 426 55 1,273 (1,767) 16 (1,751) 971 543 (22) 450 (28) 255 227 CY12E 1,552 277 74 (9) 485 121 1,530 (831) (230) (1,062) 79 547 (9) (459) 10 227 237 CY13E 1,813 300 (59) (56) 552 (4) 1,441 494 (600) (106) (650) 547 (56) (1,141) 194 237 431

Key Ratios
Y/E Dec. Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (GB) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) 3 37 4 43 (7) 3 35 5 42 (7) 3 34 4 44 (7) 3 36 6 49 (7) 3 35 5 48 (7) 3 35 5 44 (9) 160.7 180.9 119.8 164.3 250.4 124.2 149.4 219.0 114.0 88.1 81.9 90.3 58.4 49.6 69.5 58.9 61.4 58.6 55.4 55.4 65.0 42.5 49.1 67.9 67.9 79.5 48.5 60.3 84.9 84.9 98.2 48.5 88.7 99.7 99.7 115.6 48.5 132.1 110.7 110.7 139.4 48.5 186.5 130.8 130.8 161.9 48.5 260.1 83.5 71.2 94.2 0.9 10.1 51.4 87.0 68.1 58.2 76.7 1.0 8.5 42.9 72.4 54.5 47.1 52.1 1.0 7.0 35.5 49.9 46.4 40.0 35.0 1.0 5.8 29.2 19.8 41.8 33.2 24.8 1.0 5.3 24.9 15.1 35.4 28.6 17.8 1.0 4.4 21.3 14.5 CY08 CY09 CY10 CY11 CY12E CY13E

February 22, 2013

Nestle India | 4QCY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Nestle India No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 22, 2013