Maintain REDUCE on Nestle India - Steady revenue show; employee cost dents margins - HDFC Securities

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

Nestle's 4QCY20 revenue growth was largely in line with beat in gross margin. High employee cost (long-term compensation arrangements to factory employees) impacted the margin (miss in EBITDA). Domestic revenue grew by 10% YoY while exports were down by 8% YoY. Thereby, overall revenue growth of 9% was slightly below estimates (HSIE 11%). Packaged food category continued to perform well, and Nestle's performance in CY20 was steady (8% YoY growth). Maggi, Kitkat and Nescafe (in-home consumption) posted double-digit growth during the year, capitalising on the reduced mobility among consumers. However, weak coffee exports impacted overall exports (-8% in 4Q and +1% in CY20). GM expanded by robust 231bps YoY to 59%, the highest in the past eight quarters. EBITDA grew by 10.4% as compared to our expectation of 17% growth; the key difference was due to high employee cost (25% up YoY). We expect Nestle to deliver steady earnings growth, aided by new launches and improved distribution. Moderation in in-home consumption categories will impact key brands but revival in OOH will support growth. We maintain our EPS estimate for CY21E/CY22E. We value Nestle at 55x P/E on CY22E EPS to derive a TP of Rs 16,326. The stock is trading at 58x P/E on CY22E EPS and limits absolute upside in the medium term, making the risk-reward unattractive. Maintain REDUCE.

Marginal miss in revenue: Revenue grew by 9% YoY (+9% in 4QCY19 and +10% in 3QCY20) vs the expectation of 11% YoY growth. Domestic revenue grew by 10% YoY while Exports saw an 8% YoY decline. OOH consumption continued its sequential recovery. E-commerce continued its stellar growth (>100% growth in CY20), contributing 4% of domestic revenue. Maggi Noodles, Kitkat and Nescafe clocked double-digit growth during CY20.

Employee cost dents EBITDA: GM expanded by 231bps YoY (-218bps in 4QCY19 and +54bps in 3QCY20), HSIE +73bps expansion. Employee cost was up by 25/19% YoY in 4Q/CY20 on account of high incentives due to COVID and finalisation of long-term compensation arrangements for factory employees. Other expenses grew by 11% YoY. EBITDA margin expanded by 29bps YoY to 22.6% (+94bps in 4QCY19 and +140bps in 3QCY20), vs our estimate of 122bps YoY expansion. EBITDA grew by 10% YoY, HSIE 17% YoY. Lower other income and high depreciation resulted in 7% PBT growth while PAT declined by 1% YoY due to lower tax rate in base quarter.

Press release takeaways: (1) Out of home demand showed improvement during the quarter; (2) domestic sales growth, broad-based and largely driven by volume and mix; (3) in-home consumption (65% of domestic), posted double-digit growth; (4) Innovation and Renovation pipeline continues to be a thrust area; (5) Exports were impacted by lower coffee exports; (6) the company recommended a final dividend of Rs 65 per share.

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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