Nestle India's Q4CY19 results (Downgrade to Neutral) - Healthy earnings print, Valuations cap upsides...
Q4CY19 result highlights
- Nestle India’s net sales were up 8.8% yoy to Rs31.3bn (est: Rs31.5bn), EBITDA grew by 13.6% yoy to Rs6.59bn (est: Rs5.95bn) and Adj. PAT (adj. for Rs415m provisions of contingencies in the base qtr) grew by 23.4% yoy to Rs4.7bn (est: Rs4.7bn) due to lower tax rate. Consensus EBITDA est. stood at Rs6.8bn.
- Domestic sales grew by strong 10% yoy driven by both volume and mix. Export Sales declined by 9.7% 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 sharply by 220bp yoy (and by another 80bp qoq) to 56.5% 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 sharply by 15.3% yoy and other expenses (incl. provision for contingencies & CSR) decreased by 5% yoy as base quarter had higher brand spends. Resultant EBITDA margins improved by 90bps yoy at 21.1% (est. of 18.9%).
Key positives: Strong domestic sales in current poor macro environment.
Key negatives: Higher input cost led contraction in gross margins.
Impact on financials: Cut CY20/21E EBITDA by 5%/3.5% and cut EPS for CY20/21E by 7%/5.5%.
Valuations & view
Nestle reported yet another healthy topline performance with revenue growth indicative of continued outperformance in volume growth compared to peers. We continue to be firm believers in Nestle’s execution & innovation capabilities; however, raw material inflation has been much sharper and rigid versus our earlier expectation. Undoubtedly, Nestle is best placed to increase prices but in the current weak consumer sentiment we believe it will be a more gradual exercise leading to gross margins bearing the brunt of the same. This coupled with sharp run-up in the stock price makes us downgrade Nestle a notch to Neutral, with a revised PT of Rs15,021 (55x CY21E EPS) even as we continue to value it at a 10% premium to HUL’s target multiple. We await a better price or correction in raw material prices to enter the stock
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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