RESEARCH: GOLDMAN SACHS
RATING: SELL
CMP: RS 2622
Goldman Sachs downgrades Nestle India to `Sell’ from `Neutral’, on valuation grounds and revises the 12-month target price to Rs 2,376. Nestle India’s current valuation is expensive as it trades at a one-year forward rolling P/E of about 29x, which is high compared with its long-run average of 25x. Although Nestle India remains structurally well-positioned to deliver strong 19% topline CAGR in FY09-FY12E, given its exposure to low-penetration processed food categories and urban skew, Goldman Sachs forecasts flat gross margins in FY10E driven by a spike in raw material costs. Nestle India’s current absolute P/E and 35% P/E premium relative to our India consumer staples coverage are both about one standard deviation above their long-run trends. Nestle India would need to continue investing in brands to maintain its high topline growth. Goldman Sachs lowers FY10E-FY12E EPS by 2%-4% post-FY09 results.

SOURCE: ET INTELLIGENCE