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Maintain REDUCE on Nestle India - Revenue momentum sustains; miss in margin - HDFC Securities

Posted On: 2021-10-21 09:17:00 (Time Zone: IST)


Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

Nestle's Q3CY21 revenue was in line while EBITDA margin was below our estimate. Domestic revenue growth was up by 10% (+10% 2-year CAGR, +10% HSIE), driven by volume and mix. E-commerce continued to gain traction, while organised trade (especially coffee and confectionary) and out-of-home (OOH) saw recovery. Exports remained weak and reported 1% YoY revenue growth. Gross margin came in lower than expected at 55.7%, contracting 239/130bps YoY/QoQ, due to rising raw material cost (edible oil and packaging material) but was partly offset by better realisation. EBITDA was up 6% YoY (+11% 2-year CAGR, HSIE 10%). We expect Nestle to sustain healthy growth for in-home products (aided by its ecommerce and hyper-local channels) and recovery in OOH products (higher mobility). We maintain our EPS estimates for CY21E/CY22E/CY23E and value Nestle at 55x P/E on Sep-23E EPS to derive a TP of INR 17,572. With rich valuation, the absolute upside is limited in the medium term, making the risk-reward unattractive. Maintain REDUCE.

Revenue in line: Revenue grew by 10% YoY (+10% in Q3CY20 and +14% in Q2CY21), a beat in line with our expectation. Domestic revenue grew by 10% YoY (+10% in Q3CY20 and +14% in Q1CY21, +10% HSIE) while exports grew 1% YoY (10% HSIE). E-commerce continued to gain traction. Maggi noodles and Masala-AE-Magic clocked healthy growth; however, Maggi sauce growth was muted on decreased in-home consumption, strong base, and increased competitive intensity. Milk products and nutrition, confectionary, and beverages saw double-digit growth.

Weak margin: GM, impacted by rising raw material prices (edible oil and packaging materials), contracted by 239bps YoY (+54bps in Q3CY20 and +67bps in Q2CY21) vs. HSIE estimate of 109bps contraction. Employee/other expenses were up by 5/4% YoY. EBITDA margin contracted by 84bps YoY to 24.8% (+140bps in Q3CY20 and -75bps in Q1CY21) vs. our estimate of a YoY flat margin. EBITDA grew 6% YoY (HSIE 10% YoY). PAT was up 5%.

Press release takeaways: (1) Double-digit growth is seen across milk products and nutrition, confectionary and beverages; (2) Organised trade (mid-twenties growth) and OOH are seeing recovery as the economy opens up; (3) E-commerce continued to gain traction; (4) Price outlook for key categories like wheat, coffee, and edible oils remains firm to bullish while costs of packaging material continue to increase; (5) Fresh milk prices are expected to remain firm with continued increase in demand and rise in feed costs to farmers; (6) Scrapping import duties on edible oils, post FY22, can positively impact and control food inflation pressures.

Shares of Nestle India Limited was last trading in BSE at Rs. 19377.50 as compared to the previous close of Rs. 19427.25. The total number of shares traded during the day was 2424 in over 1269 trades.

The stock hit an intraday high of Rs. 19733.50 and intraday low of 19285.40. The net turnover during the day was Rs. 47307187.00.


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