Nestle India - Just a tad underwhelming (given the high benchmarks expected from Nestle India) - ICICI Securities

Domestic revenue growth of 10% in Q3CY20 (with ~7% volume growth (our view)) was underwhelming given the stronger volume growth performance by most Consumer Staples companies in our coverage (barring Britannia). We believe that this is driven by a lower growth in the infant nutrition business - our primary research indicated likely lower birth rates in CY21, a potential headwind for the segment. However, our long-term positive view is intact driven by (1) structural tailwind from increasing consumer propensity to consume packaged foods, (2) benefits from key input prices being low, (3) continued investment behind brands (even a step-up in Q4CY20) and (4) significant increase in capex (Rs26 bn planned over CY20-23 which is = cumulative capex of CY12-19). HOLD retained.

- Double-digit domestic revenue growth: Revenue / EBITDA / recurring PAT grew 9% / 11% / 2% YoY. Domestic sales grew 10% - we estimate ~7% volume growth. This performance was driven by volume and mix-led broad based growth. Demand in out-of-home channels improved sequentially but continued to be impacted. Export sales declined 8% due to decline in coffee exports. Two-thirds of key brands like Maggi, KitKat and Nescafe grew double-digit in CY20 boosted by in-home consumption - we believe that infant nutrition business remained weak. E-commerce grew by 111% in CY20 and contributes ~3.7% of domestic revenues, still significant headroom to grow.

- Input cost benefit mitigated increased staff cost and ad-spends: Gross margin expanded 240bps to 58.9% driven by milk and milk derivatives price deflation (constitutes 51% of Nestlé's total COGS). However, other expenses increased 60bps (increase in marketing spends, reduction in overheads) and staff cost was up 150bps (higher incentives in view of COVID, finalisation of long-term compensation arrangements for factory employees). This translated into a 30bps improvement in EBITDA margin - EBITDA grew 11% YoY. PBT grew 7% due to lower other income (down 28% YoY from lower yields).

- Balance sheet and cash flows: OCF grew 10% to ~Rs24.5bn. However, FCF declined 5% to ~Rs19.8bn due to increase in working capital days by 5 days (receivables and inventory days increased by 1 day each while creditor days reduced by 3 days) and higher capex (~Rs4.8bn; +210% YoY).

- Valuation and risks: We cut our earnings estimates by ~4%; modelling revenue / EBITDA / PAT CAGR of 15 / 18 / 21 (%) over CY20-23E. Maintain HOLD rating with DCF-based target price unchanged at Rs17,500. Key risks are consumption slowdown linked to economic performance and keyman risk.

Shares of NESTLE INDIA LTD. was last trading in BSE at Rs.17222.45 as compared to the previous close of Rs. 17484.5. The total number of shares traded during the day was 7901 in over 2887 trades.

The stock hit an intraday high of Rs. 17634.6 and intraday low of 17141.25. The net turnover during the day was Rs. 136577962.

Source : Equity Bulls

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