Nestle India's Q3CY19 results (Outperformer) - Revenue outperformance continues...
Q3CY19 result highlights
- Nestle India’s net sales were up 9.5% yoy to Rs32bn (est: Rs31.8bn), EBITDA grew by 3.8% yoy to Rs7.35bn (est: Rs7.3bn) and PAT grew by 33.4% yoy to Rs5.95bn (est: Rs5.9bn) due to tax rate cuts.
- Domestic sales grew by strong 10.5% yoy driven by both volume and mix. Export Sales declined by 7% due to lower exports of coffee to Turkey. We believe domestic volume growth is likely to be in high single digits for the quarter. Maggi, Kitkat, Munch, Nescafe RTD, Nangrow and Ceregrow delivered strong performances.
- Gross margins fell 210bp yoy (down 70bp qoq) to 57.3% driven by commodity inflation largely in milk and its derivatives and the impact of the same has not been completely passed on to the consumer.
- Staff cost increased by 11% yoy and other expenses (incl. provision for contingencies & CSR) increased by 5.1%. Resultant EBITDA margins declined by 130bps yoy at 23% (est. of 23.2%).
- D&A expense decreased by 16.1% yoy. Other income decreased by 13.6% yoy due to lower average liquidities following the payment of special interim dividend, Interest expense increased by 9% yoy.
Key positives: Healthy domestic sales.
Key negatives: Higher input cost led contraction in gross margins.
Impact on financials: Cut CY19/20E sales/EBITDA by 2-4%. EPS for CY19/20E up 5%/9% on account of lower tax rate.
Valuations & view
Nestle reported yet another healthy performance with revenue growth indicative of continued outperformance in volume growth compared to peers. We remain positive on Nestle’s execution & innovation capabilities and are factoring 13% domestic sales CAGR over CY19-21E, highest among consumer staples. Input cost environment is likely to remain challenging in the near term. However, with expected moderation in milk prices given the healthy monsoons as well as base catching up, we believe, the extent of gross margin contraction will reduce. Overall revenue/earnings visibility remains healthy, hence, premium valuations (58x/50x CY20/21E earnings) are likely to sustain. Maintain OP, with revised price target of Rs15,313 (53x CY21 EPS).
Nestle India is engaged in the food business. Co.'s product groups are: milk products and nutrition; beverages; prepared dishes and cooking aids and chocolates and confectionery. Co.'s milk products and nutrition include: NESTLE a+ Milk, NESTLE Slim Milk, NESTLE a+ Dahi, NESTLE Slim Dahi and MILKMAID Sweetened Condensed Milk. Co.'s beverages include: NESCAFE, NESCAFE SUNRISE and NESTEA. Co.'s prepared dishes and cooking aids include: MAGGI Noodles, Veg Atta Noodles, Multigrainz Noodles and 2-Minute Noodles, MAGGI HUNGROOO, MAGGI Magical Masala Noodles, MAGGI Masala-ae-Magic spice mix and MAGGI Soups.Co.'s chocolates and confectionary include: Nestle KITKAT, NESTLE MUNCH and Nestle MILKYBAR.
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