Nestle India's Q2CY18 results (Outperformer) - Earnings upgrade cycle continues!

Q2CY18 result highlights

• Nestle India’s net sales were up by 12% yoy to Rs27bn(est: Rs27bn), EBITDA increased by 41% yoy to Rs6.3bn(est: Rs6.2bn) and PAT increased by 50% yoy to Rs4bn (Rs3.8bn).
• Domestic sales (net of excise) increased by 12% yoy. Comparable domestic sales increased by 14.5% yoy led by volume growth across segments.
• Gross margins improved by 460bps yoy to 59.3% aided by lower input costs (milk & milk solids). Staff cost increased by 12.5% yoy and other expenses increased by 11% yoy. Resultant EBITDA increased by 41% yoy with a margin expansion of 480bps yoy at 23.5%.
• Depreciation expense decreased by 4.4% yoy. Other income increased by 41% yoy & interest expense increased by 23% yoy, resulting in PAT growth of 50% yoy.

Key positives: Healthy volume growth and margin expansion

Impact on financials: Factoring strong operational performance, we increase our CY18/19/CY20E earnings by 3.6% each.

Valuations & view

Nestle continued to deliver strong volume led revenue growth which coupled with continued margin expansion resulted in a strong revenue, EBITDA, PAT growth of 11%/38%/44% for 1HCY18. The double digit volume growth has come off a higher base (high single digit volume growth) as compared to peers which makes the performance even more impressive. With core brands continuing to do well and pace of innovation remaining steady, double digit revenue trajectory (factoring 13% CAGR over CY17-20E) is likely to sustain. Further, benign milk/SMP (38%of COGS) prices as well as Nestle’s ability to premiumise and take price increases can more than offset likely inflation in wheat prices on account of MSP hikes. With revenue & margin levers remaining intact, we are factoring 21% earnings CAGR over CY17-20E, which is highest among our staples coverage universe & justifies the premium valuations of 49.5x/42x CY19/20E earnings. Maintain Outperformer.