Nestle India's Q4CY17 results (Outperformer) - Firing on all fronts!
Q4CY17 result highlights
- Nestle India’s net sales were up by 15.6% yoy to Rs25.9bn(est: Rs25.5bn), EBITDA increased by 34% yoy to Rs6bn(est: Rs5.3bn) and Adjusted PAT increased by 31% yoy to Rs3.6bn (Rs3.3bn).
- Domestic sales (net of excise) increased by 15.8% yoy. Comparable domestic sales increased by 18.1% yoy led by volume growth across segments, including rebuilding of Maggi noodles and benefit of improved realisations.
- Gross margins improved by 160bps yoy to 58.7% aided by lower input costs. Staff cost increased by 14.3% yoy and other expenses increased by 8.8% yoy. Resultant EBITDA increased by 34.4% yoy with a margin expansion of 330bps yoy at 23.2%.
- Depreciation expense increased by 26.5% yoy. Other income declined by 6% yoy & interest expense increased by 11.2% yoy. Reported PAT increased by 59.6% yoy due to lower provision for contingencies.
Key positives: Strong volume growth and margin expansion
Impact on financials: Factoring strong operational performance, we increase our CY18/CY19E earnings by 4%/6% respectively.
Valuations & view
The indicative double digit volume growth trajectory as well as strong sequential margin improvement have been better than expectations. We expect CY18 for Nestle to be extremely strong as benefits of GST rate cuts and incremental growth from new product launches drives revenues. Further, with over 50% of Nestle’s COGS being deflationary (milk, SMP, wheat, sugar) gross margin trajectory will be healthy. Nestle’s operating margins have lagged gross margin improvement in the last 6 years due to negative operating leverage as revenue CAGR was weak at 4.8%. We believe as Nestle reverts to its double digit revenue growth trajectory, operating leverage will drive EBITDA margin improvement (factoring 160bp over CY17-19E). We believe at 37.7xCY19E earnings, valuations are very attractive given Nestle is trading at a 15% discount to its historical average. We factor 19% earnings CAGR for Nestle India over CY17-19E and value the company at 45xCY19E earnings. Maintain Outperformer; Nestle is one of our top picks in the FMCG space.
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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