Why Citi, Kotak Are Bullish On Nestle India Despite High Valuations

Citi Research and Kotak Institutional Equities are bullish on Nestle India Ltd., buoyed by new launches and a cluster-based marketing and distribution approach, even as the stock trades at a premium to its historical valuations.

The fast-moving consumer goods maker launched 39 products in the last couple of years, ranging from new variants in its packaged foods segment (largely Maggi), chocolates and confectioneries to dairy products and coffee, Kotak said in a report, based on a management call with Nestle India. Eleven of these failed and have been taken off the shelves, but the company is willing to learn and adapt which is a positive step, it said.

Based on the newly adopted cluster approach for marketing and distribution, the company has 15 clearly defined geographical regions that will help it efficiently reach consumers and differentiate with a sharper understanding of consumer insights, Citi Research said in a note based on the management call.

Here’s what Kotak Equities had to say on Nestle India:

• Rating: Add; with target price of Rs 11,000.
• Maggi noodles volumes are back to 90 percent of the peak pre-crisis levels of 2015, while sales are back to 100 percent.
• New launches in ready-to-drink beverages and chocolates have been key successful launches.
• Company to continue to focus on expansion in brand Maggi’s positioning beyond noodles and pasta.
• Encouraging initial response to Nesplus breakfast cereals from trade channels and consumers.

Here’s what Citi Research said on Nestle India:

• Rating: Buy; with target price of Rs 11,800.
• Portfolio in India still in formative stages--innovations and renovations likely to fuel growth.
• Cluster wise strategy to enable company to reach consumers more efficiently.
• NesPlus breakfast cereals, Nestle Health Science portfolios are addressing significant need gaps.
• Double digit growth in last quarter was led by volume.

High Valuations

The Nestle India stock trades at nearly 74 times its trailing 12-month earnings, a premium of 17 percent to its five-year average. The Bloomberg consensus price-to-earnings ratio of 66 times for financial year 2018-19, too, is higher.

The valuations are warranted on the back of expected “volume growth through distribution expansion in smaller regional towns”, said the Citi report, and its entrance into new categories like breakfast cereals.

As much as 60 percent of 40 analysts tracked by Bloomberg have a ‘Buy’ rating on Nestle India; 33 percent recommend ‘Hold’ and 8 percent have a ‘Sell’ call. The stock is trading higher than the 12-month consensus price target of Rs 10,924, according to Bloomberg data.