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NESTLE 4QCY10: In-line; Domestic sales up 27%; US$450m ECB approval indicates aggressive growth plans; Buy

Domestic net sales grew a robust 26.6% to Rs.16b led by strong volume growth and realization growth. Exports de-grew 17.3% to Rs.748m.

Gross margin expanded 60bp YoY to 52.4% due to improved product, channel mix and selective price increases.

EBITDA margin at 19.7% expanded 500bp due to 310bp YoY decline in staff cost and 130bp decline in other expenditure.

Other income increased 31.6% due to higher surplus in rising interest rate scenario; tax rate increased 310bp YoY to 28%.

The company declared final dividend of Rs.12.5/share; dividend has been capped at last year’s level to fund mega expansion plan of the company.

We see aggressive expansion plan as a reflection of positive business outlook for coming years. However, we believe that Nestle is a volume growth story with little scope to expand margins from the current levels of 20%. The stock trades at 34x CY11 EPS of Rs103 and 28x CY12 EPS of Rs.125.5. We expect valuation premium to sustain due to strong growth outlook, established brands and support from its parent Nestle SA.
Buy with a target price of Rs.4,016.