Maintain REDUCE on Nestle India - HDFC Securities

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

Maintain REDUCE on Nestle India - In-line revenue, margin expansion continues

Nestle's 1QCY21 revenue was mostly in line, but the EBITDA margin witnessed a slight miss due to high marketing spends. Domestic revenue growth was broad-based - up by 10% - largely driven by volume and mix. Maggi, Kitkat and Nescafe (in-home consumption) remained strong and posted double-digit growth. OOH consumption further improved but continues to be impacted by COVID. E-commerce channel grew by 66% (>100% in CY20) and contributed ~4% towards domestic sales. Exports were down by 13% due to lower exports to affiliates. Gross margin continued to see acceleration and clocked >200bps YoY expansion due to benign raw material cost (particularly milk and derivatives). Higher advertising and sales promotion limited the EBITDA margin expansion. EBITDA was up by a healthy 15% YoY (HSIE 20%). With rising lockdown pressure, the near-term demand for packaged food is expected to be strong. New launches, improved distribution, and greater in-house consumption should deliver a healthy earnings show in the medium term. We maintain our EPS estimate for CY21E/CY22E. We value Nestle at 55x P/E on CY22E EPS to derive a TP of INR 16,326. With rich valuation, the absolute upside is limited in the medium term, making the risk-reward unattractive. Maintain REDUCE.

Healthy and in-line revenue growth: Revenue grew by 9% YoY (+11% in 1QCY20 and +9% in 4QCY20) vs the expectation of 10% YoY growth. Domestic revenue grew by 10% YoY while Exports declined by 13% YoY. Out-of-home consumption continued to recover sequentially. E-commerce sustained momentum, contributing 4% towards domestic revenue. Maggi Noodles, Kitkat and Nescafe clocked double-digit growth, similar to CY20.

EBITDA clocked 15% growth: GM expanded by 223bps YoY (-223bps in 1QCY20 and +231bps in 4QCY20), vs HSIE estimate of +200bps expansion. Employee cost was up by only 3% due to previous year's high base (high incentives due to COVID and finalisation of long-term compensation arrangements for factory employees). Other expenses grew by 15% YoY due to high advertisement and sales promotion. EBITDA margin saw an expansion of 150bps YoY to 25.9% (-146bps in 1QCY20 and +29bps in 4QCY20), vs our estimate of 230bps YoY expansion. EBITDA grew by 15% YoY (HSIE: 20% YoY). PAT was up by 15%.

Press release takeaways: (1) Out-of-home demand showed improvement during the quarter; (2) domestic sales growth was 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) company recommended an interim dividend of INR 25 per share.

Shares of NESTLE INDIA LTD. was last trading in BSE at Rs.17086.25 as compared to the previous close of Rs. 17090.35. The total number of shares traded during the day was 3872 in over 1576 trades.

The stock hit an intraday high of Rs. 17371.5 and intraday low of 16885.5. The net turnover during the day was Rs. 66257321.

Source : Equity Bulls

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