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Neutral Nestle India, target Rs 10,620: Motilal Oswal Securities

Motilal Oswal Securities has a neutral call on Nestle India with a target price of Rs 10,620.

The current market price of Nestle India is Rs 10,887.80.

Time period given by the brokerage is one year when Nestle India price can reach the defined target.

Valuation and view of the brokerage on the company:

Among the various points discussed in the analyst meet, we were particularly enthused by the volumes outperformance of 200bp (not shared in interim results) versus our estimate, which consequently prompted us to raise our sales and PAT forecasts for FY19. At the same time, we also note that the current-year margins have been largely propped by extremely muted material costs.

While the sales prospects appear promising for CY18 and CY20 (highest for NEST since CY11), the risks on the margins front are high, particularly after the windfall gross margin gains in 1HCY18. This is mainly because material costs have started trending up and management has stated its intention of protecting growth even if it means lower price increases than in the past in response to material cost movement.

While NEST is on a much stronger footing than any time in the current decade, valuations of 48.8x CY20E EPS fairly capture these prospects, in our view. We, thus, maintain our Neutral rating with a target price of Rs 10,620 (49x Sep’20E EPS).


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