EUR 120.00 For Business Accounts Only

MOSL : NESTLÉ INDIA: EBITDA in-line; fair valuation limits upside

 NESTLÉ INDIA: EBITDA in-line; fair valuation limits upside

(NEST IN, Mkt Cap USD22.9b, CMP INR19755, TP INR18700, 5% Downside, Neutral)

• Nestlé India (NEST) delivered a slight beat on our sales estimates. Sales growth was driven by double-digit YoY growth across segments, led by better volumes, mix and higher realizations. While demand and sentiment remained strong in metros, it was robust across smaller towns and rural markets as well – an encouraging development.
• Gross margin came in 170bp lower than our estimate, on account of higher commodity costs for key inputs. However, management commentary points to early signs of softening in edible oils and packaging materials even as fresh milk, fuels, grains, and green coffee costs remain firm. Nevertheless, we believe gross margin may have bottomed out in 3QCY22 and a recovery led by lower input costs and better realizations is imminent in the coming quarters.
• The e-commerce channel continued to deliver robust growth and accounted for 7.2% of 3QCY22 sales. NEST has doubled-down on this channel by announcing the launch of its in the NCR region and plans to expand its presence to other parts of the country.
• We value the stock at 55x Sep'24 EPS to arrive at our TP of INR18,700. We reiterate our Neutral stance on fair valuations.

Sales beat; gross margin pressure higher than expected

• NEST reported net sales growth of 18.2% YoY to INR45.9b (est. INR43.5b). Domestic sales grew 18.3% YoY, driven by volume and mix. Export sales grew 15.7% YoY to INR2.1b.
• Gross margin contracted 290bp YoY to 52.8% (est. 54.5%).
• EBITDA grew 6.8% YoY at INR10.2b (in-line). EBITDA margin contracted 240bp YoY to 22.1% (est. 22.7%).
• PBT grew 8.8% YoY to INR9.1b (est. INR8.6b).
• PAT rose 8.5% YoY to INR6.7b (est. INR6.4b).
• The company has declared second interim dividend of INR120/share.

Segmental highlights

• Prepared Dishes and Cooking Aids: Growth was driven by Maggi noodles, aided by media and distribution expansion.
• Milk Products and Nutrition: Decent segmental performance with strong growth in Milkmaid.
• Confectionery continued its strong performance, aided by aggressive media campaigns, festive and consumer promotions and distribution drives.
• Beverages: Strong growth in Nescafé Classic, Sunrise, and vending mixes.

Key highlights from the management commentary

• Revenue: Achieved highest quarterly sales in the last five years on the back of strong volume and mix. Witnessed double-digit growth across all categories.
• Commodity costs: witnessing stability in prices of edible oils and packaging materials. However, fresh milk, fuels, grains, and green coffee costs are expected to remain firm with continued increase in demand and volatility.
• D2C platform: It has launched a D2C platform during the quarter. Initially, it will be launched in Delhi NCR, and subsequently, will expand to other parts of the country.
• E-commerce channel showed increased acceleration and contributed 7.2% to sales. Organized trade channels are witnessing strong growth across categories on account of high footfalls.
• OOH channel grew at a robust pace, driven by faster channel reopening and business-led initiatives.