Nestle India - Q1CY22 Result Update - Margins yet to bottom out: Accumulate

Amnish Aggarwal, Director - Research at Prabhudas Lilladher.

Quick Pointers:

- EPS cut 2.1%/1.6% for CY22/23 due to elevated RM environment

- Margins expected to remain under pressure in 2Q/3QCY22.

We cut CY22/23 EPS estimates by 2.1%/1.6% following 313bps gross margin slippage in 1Q22 despite double digit topline growth and strong momentum across key brands. We expect near term volume pressures led by grammage reduction LUP's in chocolates, Maggi and Milk products. Medium to long term growth drivers remain intact led by 1) sustained expansion in rural reach (only 20% of sales) 2) availability of capacity in Maggi 3) huge scope of growth in segments like coffee, RTD and Chocolates and 4) higher growth in channels of future like E-commerce (up 71% YoY in 1Q, 6.3% of domestic revenues). While we expect further pickup in growth in OOH segments, 4th covid wave might be a risk in the near term.

We expect near term margin pressure to sustain given inflation in Coffee, Palm oil, Milk and SMP. We factor in EBIDTA margin decline of 140bps in CY22 (40bps over CY21-23) as scale efficiencies, mix and pricing actions won't be able to neutralize 10-year high inflation. We estimate 12.4% PAT CAGR over CY21-23. We expect back ended returns given near term margin pressures and rich valuations of 62.3x CY23 EPS. We maintain Accumulate with a TP of Rs 19,426 on DCF basis (Rs19,626 earlier).

Sales up by 10.2%, PAT down by -0.2%: Revenues grew by 10.2% YoY to Rs39.8bn (PLe: Rs 40.4bn) with domestic/export sales up by 10.2%/-1.0%. Gross margins contracted by 313bps YoY to 55.4% (Ple: 56.2%) impacted due to high RM cost, particularly edible oils, milk and its derivatives and packaging materials, partly offset by better realisations. EBITDA grew by 0.1% YoY to Rs9.3bn (PLe:Rs 9.6bn); Margins contracted by 238bps YoY to 23.4% (PLe:23.8%). Lower employee & other expenses as a % of sales helped to partially offset the raw material pressure. Adjusted PAT declined by 0.2% YoY to Rs6bn (PLe:Rs 6.4bn). Board declared an interim dividend of Rs25/ share on 11th April 2022.

Double digit growth across key brands, input pressure to remain over short term: MAGGI noodles KITKAT, MUNCH, NESCAFÉ Classic and Sunrise reported double digit growth 1) media campaigns 2) consumer promotions 3) analytics-based consumer insights 4) geo-targeted distribution drives and 5) festive seasons. Price outlook of key commodities like wheat, coffee, edible oils, milk and fuel remains firm to bullish which is likely to impact near term margins despite focus on cost optimization and efficiencies.

Expect Gross margin pressure to continue for 2Q/3Q22: NEST continues to witnessed headwinds in commodity prices across edible oils, coffee, wheat, fuel and packaging material. Nutrition business saw pricing actions which helped to partially offset some pressure from rise in milk prices. Inflationary trend across commodities is expected to sustain over the short to medium term.

Shares of Nestle India Limited was last trading in BSE at Rs. 18205.80 as compared to the previous close of Rs. 18313.70. The total number of shares traded during the day was 4590 in over 1770 trades.

The stock hit an intraday high of Rs. 18572.95 and intraday low of 17772.90. The net turnover during the day was Rs. 83217542.00.

Source : Equity Bulls

Keywords

NestleIndia INE239A01016 Q1CY22 ResultUpdate PrabhudasLilladher