Maintain REDUCE on Nestle India - Beat on revenue, a miss in margin - YES Securities

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

Nestle's Q2CY21 revenue was slightly ahead of our estimate, but the EBITDA margin was lower than the estimate. Domestic revenue growth was up by 14% (+8% 2-year CAGR, +10% HSIE), driven by volume and mix, albeit on a low base. Key products (in-home consumption) sustained traction and posted strong double-digit growth. The e-commerce channel grew by 105% and contributed towards 6% of sales. The contribution of innovative products has been rising, now at 5%. Exports were up 18% YoY (15% HSIE), on a favourable base, but were flat QoQ. Gross margin expanded 67/-152bps YoY/QoQ to 57%, lower-than-expected due to rising raw material cost. EBITDA was up 11% YoY (+9% 2-year CAGR, HSIE 16%). Capex was at INR 10bn in H1CY21, out of the committed INR 26bn over the next 3-4 years. We expect the company to continue its growth in in-home products, aided by its ecommerce and hyperlocal channels and, with markets opening up, we expect to see recovery in the OOH segments. We maintain our EPS estimates for CY21E/CY22E/CY23E and value Nestle at 55x P/E on Jun-23E EPS to derive a TP of INR 17,108. With rich valuation, the absolute upside is limited in the medium term, making the riskreward unattractive. Maintain REDUCE.

Revenue beat: Revenue grew by 14% YoY (+4% in Q2CY20 and +10% in Q1CY21), a beat on our expectation of 10% YoY growth. Domestic revenue grew by 14% YoY (+3% in Q2CY20 and +10% in Q1CY21, +10% HSIE) while exports grew 18% YoY (15% HSIE). E-commerce more than doubled (+105%) now, contributing 6.4% towards domestic revenue. Maggi noodles, Kitkat, Nestlé Munch, Maggi sauces, Maggi Masala-AE-Magic clocked strong double-digit growth.

GM impacted by rising input cost: GM, impacted by rising raw material costs of oils and packaging materials, expanded by 67bps YoY (-193bps in Q2CY20 and +223bps in Q1CY21), vs. HSIE estimate of +216bps expansion. Employee cost was up by 2% due to previous year's high base. Other expenses grew by 30% YoY on a low base. EBITDA margin saw a contraction of 75bps YoY to 24.4% (+130bps in Q2CY20 and +150bps in Q1CY21), vs. our estimate of 126bps YoY expansion. EBITDA grew by 11% YoY (HSIE 16% YoY). PAT was up by 11%.

Press release takeaways: (1) Key products (in-home consumption) posted strong double-digit growth. (2) Domestic and export sales were driven by volume and mix. (3) E-commerce was up 105% YoY, contributing to 6.4% of domestic sales in Q2CY21, while hyperlocal channels grew by 147% YoY in H1CY21. (4) Contribution of innovations to domestic sales stood at 4.9% in H1CY21. (5) Commodity prices is rising across oils and packaging materials. (6) It has invested ~INR 10bn of its INR 26bn commitment made last year.

Shares of NESTLE INDIA LTD. was last trading in BSE at Rs. 17725 as compared to the previous close of Rs. 17909.9. The total number of shares traded during the day was 1799 in over 798 trades.

The stock hit an intraday high of Rs. 17932.7 and intraday low of 17664.9. The net turnover during the day was Rs. 31970388.

Source : Equity Bulls

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