Nestle India's Q4CY18 results (Outperformer) - Healthy domestic sales, higher brand spends impacts earnings

Q4CY18 result highlights

• Nestle India’s net sales were up by 11% yoy to Rs28.8bn(est: Rs29bn), EBITDA decreased by 3.5% yoy to Rs5.8bn(est: Rs6.9bn) and PAT increased by 10% yoy to Rs3.4bn (Rs4.3bn).
• Domestic sales increased by 12% yoy led by volume growth across segments. Export Sales remained flat due to lower exports to Bangladesh & UAE.
• Gross margins were flat yoy at 58.7% aided by stable input costs. Staff cost increased by 7% yoy and other expenses increased by 26% yoy largely due to increase in marketing spends behind new launches. Resultant EBITDA margin declined by 300bps yoy at 20.2%.
• Depreciation expense decreased by 25% yoy. Other income increased by 49% yoy due to higher yields & higher average liquidities. Interest expense increased by 8% yoy, resulting in PAT growth of 10% yoy.
• For CY18, net sales increased by 12.7% to Rs112bn, Domestic sales growth of 10.9% (comparable sales growth of 14.3% yoy),EBITDA increased by 22% yoy to Rs25.9bn with margin expansion of 170bps yoy to 23.1%,PAT increased by 31% yoy to Rs16.1bn.

Key positives: Healthy domestic sales despite high base.

Key negatives: Higher other expenses resulting in EBITDA decline

Impact on financials: Marginally cut CY19/20E by 3%/2%.

Valuations & view

Nestle reported healthy domestic volume growth (despite high base) for third consecutive quarter, however, higher spends behind new launches resulted in earnings miss for the quarter. With core brands continuing to do well coupled with healthy pace of innovation, double-digit revenue trajectory (factoring 14% domestic sales CAGR over CY18-20E) is likely to sustain. With input cost scenario remaining benign, gross margin trajectory is expected to remain stable. However, with lower RM now in base, extent of gross margin expansion is likely to be lower & will be largely driven by Nestle’s ability to drive price/mix which coupled with leverage benefit on account of healthy volume trajectory will drive overall earnings growth. With superior earnings visibility compared to peers (19% earnings CAGR over CY18-20E), premium valuations (52x/43.6x CY19/20E earnings) are likely to sustain. Maintain OP.