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MOSL: NESTLE INDIA (Neutral) - Sales in-line - low material costs lead to sharp margin improvement

NESTLE INDIA: Sales in-line; low material costs lead to sharp margin improvement

(NEST IN, Mkt Cap USD12.9b, CMP INR8968, TP INR9535, 6% Upside, Neutral)

 

• Sales growth remains subdued: Net sales rose 10.5% YoY to INR27.4b (est. of INR27.7b). Adjusted for GST accounting, sales growth was 13.4%, according to NEST's press release. Growth momentum witnessed in 4QCY17 (15.6% reported growth YoY) appears to have lost steam, despite a weak base (8.7% growth in 1QCY17).
• EBITDA margin expands 460bp YoY: Gross margin expanded 300bp YoY to 58.8%. Staff costs declined 10bp YoY to 9.8% of sales, while other expenses too fell sharply by 150bp YoY to 23.7% in 1QCY18. Consequently, EBITDA margin expanded 460bp YoY (est. of +50bp) to 25.3%. EBITDA grew 35.3% YoY to INR6.9b. Milk prices are likely to remain low, creating a favorable margin outlook for the remainder of the year. For 1QCY18, management reckons that EBITDA and PAT margins have been positively impacted by 130bp and 90bp, respectively, due to GST accounting. A decline of 4.8% in depreciation and 33% growth in other income meant that adj. PAT grew 38.7% YoY to INR4.4b.
• Other points: NEST has announced its entry into the breakfast cereal market in India. This product from Cereal Partners Worldwide (CPW) is expected to be added to its existing portfolio this year. CPW is a 50:50 joint venture with General Mills Inc., United States.