Limited Visibility For Nestle India Beyond Maggi Recovery, Analysts Say

Most analysts retained their negative or neutral stance on Nestle India Ltd. citing limited scope for earnings growth beyond the recovery in its top noodles brand Maggi following its 2015 ban.

"The five-month Maggi ban in the previous year may have affected brand affinity permanently, and other brands are yet to revive to even 3-4 percent volume growth,” brokerage IIFL Institutional Equities said in a report on Thursday.

The recent launch of a variety of products also result in inadequate focus on the core portfolio, IIFL said. The domestic brokerage estimates that the company new products contribute only about 6 percent to calendar year 2020 sales.

Despite the headwinds, Ambit Capital expects Nestle India’s double-digit growth to sustain as Maggi continues to recover lost ground. Maggi recovered strongly since its re-launch in November 2015, with market share rising to 56 percent compared with 77 percent pre-withdrawal, Ambit Capital data showed. But current multiples appear rich given limited visibility on longer term growth beyond Maggi recovery, the brokerage added.

Reflecting the concerns, Nestle India shares fell as much as 3.5 percent intra-day before recovering to close higher by 0.41 percent at Rs 6,199 on the Bombay Stock Exchange on Thursday.

The company on Wednesday reported a near 9 percent drop in its December-quarter net profit, citing demonetisation.

Here is a quick snapshot of what brokerages are saying on Nestle India earnings:

Ambit Capital

• Topline: Misses estimates
• Bottomline: Misses estimates
• Key Positives: Strong Maggi recovery
• Key Negatives: Margins contract; lack of clarity on new launch pipeline
• Catalyst: Revival of Maggi and success of new product launches will be crucial
• Demonetisation Impact: Nestle India outperformed on higher urban focus and reliance on evolved channel of modern trade and chemists
• Valuations: Expensive
• Rating/Target Price: Reiterate 'Sell’ with a target price of Rs 5,800

IIFL Institutional Equities

• Topline: Above estimates
• Bottomline: Above estimates
• Outlook: Cuts EPS estimates for calendar year 2017 and 2018 by 6 percent and 5 percent respectively
• Key Negatives: Input cost inflation and advertising spend on brands limit upside to EBITDA; Maggi recovery not as strong as expected
• Demonetisation Impact: Sales growth declined 4 percent sequentially versus 4-5 percent sequential growth possible if demonetisation had not happened
• Rating/Target Price: Maintains 'Reduce’ rating with a target price of Rs 5,875

Motilal Oswal Securities

• Topline: Above estimates
• Bottomline: Above estimates
• Key Positives: New launches, positive management commentary
• Key Negatives: Absence of volume growth
• Demonetisation Impact: Expected demonetisation to have a higher impact on discretionary product portfolio
• Valuations: Fair
• Rating/Target Price: Maintains 'Neutral’ rating with a target price of Rs 6,840