Despite 30% surge in 2019, here's why Goldman Sachs downgraded this stock to 'sell'

Nestle has been an investor favourite, with the stock rising 30 percent in 2019 alone and nearly 40 percent in the last one year despite the ongoing consumption slowdown in the country. Despite its stellar performance, Goldman Sachs has downgraded the stock to 'sell' with a target price at Rs 10,642, indicating a 25 percent downside.

"We expect Nestle to underperform driven by slowing growth in the milk products and nutrition segment (46 percent of sales as of CY18). We now expect the company to deliver a 12 percent sales and 15 percent EBITDA CAGR in CY19-22E (versus 14 percent and 17 percent previously)," the brokerage said in a report.

The stock hit its 52-week high of Rs 15,150 per share on October 31, 2019, and a 52-week low of Rs 10,028 on March 8, 2019.

For Q2 as well, Nestle India reported a net profit of Rs 595.41 crore, up 33.46 percent in the quarter ended September 30, 2019, due to lower tax expenses and strong domestic sales. The company had posted a net profit of Rs 446.11 crore in the corresponding quarter previous fiscal.

Earlier in September this year, Nestle replaced Indiabulls Housing Finance to take a place in the Nifty 50 Index.

The brokerage sees risk to growth estimates for Nestle's milk products and nutrition segment, which contributes roughly 46 percent of sales (as of CY18). Further, the brokerage sees increased competition in the baby food categories, which contribute approximately 25 percent to Nestle's domestic sales.

"Competitors like Danone, Abbott and Reckitt Benckiser compete with Nestle's brands across all price ranges and therefore increase the choice set for the consumer. These companies have all gained market share over the last five to six years, reflecting higher acceptance for the products, both from pediatricians and parents," the report explained.

Goldman Sachs believes the adoption of the new channels and the gradual shift away from the traditional channels is likely to act as a headwind to Nestle's growth.

Nestle has improved its volume growth performance across all categories over the last two years driven by new launches and the brokerage expects the momentum to continue going forward, supporting our 12 percent sales CAGR forecast for Nestle as a whole for the next three years, said the brokerage.

However, the brokerage also expect a slower pace of growth for each business than before, which it believes is not reflected in the stock's current high valuations.

The brokerage lowered its CY20-21E EPS estimate by 1-6 percent to reflect lower sales growth and slightly lower EBITDA margins. As a result, it also reduced Nestle's 12-month target price to Rs 10,642 (from Rs 11,622 earlier), which implies a 25 percent potential downside.