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MOSL:NESTLÉ INDIA: Result in line; near-term margin outlook challenging

• Nestlé India (NEST) declared broadly in-line 2QCY22 result. Volumes and price increases have played an equal part in driving 13.3% sales growth in 1HCY22 with volumes growing 7% and realization making up for the rest.
• Management pointed out that while there has been some softening in edible oil and packaging costs; milk, green coffee, wheat, etc. are at all-time high levels and are likely to remain firm for some more time. NEST’s strategy of avoiding sharp price hikes, unlike the past, means that near- term margins would continue to be under pressure.
• The acquisition of Purina PetCare’s India business (100% owned by Nestle earlier) is a good move from a CG perspective and launch of ‘Gerber’ nutrition brand is good; however, both of these will take time to scale up.
• We value the stock at 60x Jun'24 EPS to arrive at our TP of INR19,500. Maintain Neutral on fair valuations.

 

Broadly in-line result

• NEST reported net sales growth of 16.1% YoY to INR40.4b (in line). Domestic sales grew 16.4% YoY to INR38.5b in 2QCY22. Growth was primarily driven by pricing, albeit, there have been some underlying volume and mix improvements.
• Gross margin contracted 300bp YoY to 54% (est. 55.7%).
• EBITDA grew 1.8% YoY to INR8.5b (est. INR9b). EBITDA margin contracted 300bp YoY to 21% (est. 23%).
• PBT grew 1.9% YoY to INR7.3b (est. INR7.7b).
• PAT rose 3.9% YoY to INR5.5b (est. INR5.8b).
• Other income decreased 34% YoY to INR194m during the quarter.

 

Key highlights from the management commentary

• Sales growth in Mega cities and metro is healthy. Healthy uptick is also being witnessed in its rural sales. Growth in rural is across categories but Maggi, nutrition, milk and coffee are the key drivers.  
• RM CAGR over 2018-2020 was only 3%; 2021 witnessed 5% RM growth while the growth is 15% in CY22 YTD. Management stated that it will not take any indiscriminate price increase as it does not want to hurt volumes or lead to downtrading.
• NEST pointed out that while there has been some softening in edible oil and packaging costs; milk, green coffee, wheat, etc. are at all-time high levels.
• Purina is likely to have INR460m of revenue in CY22. The integration of Pet Food Business with Nestlé India Limited is proposed with effect from 1st Oct’22. The cost of this transaction is INR 1.2b. Domestic pet care category size is INR40b and it is growing at 25% YoY.
• Gerber launch – The size of the emerging toddler market in India is INR35b. NEST has a brand in this space in India known as Ceregrow. Gerber is a 90-year old global brand. Products will be developed/customized for India by using cereals, legumes, fruits, etc.