MOSL: NESTLE INDIA (Neutral)-Healthy topline growth-Soft demand outlook called out
NESTLE INDIA: Healthy topline growth; Soft demand outlook called out
(NEST IN, Mkt Cap USD15.8b, CMP INR11428, TP INR10800, 5% Downside, Neutral)
- NEST reported 2QCY19 net sales growth of 11.2% YoY to INR30b (est. INR30b). Domestic sales grew 13.1%, largely driven by (a) volume and mix, (b) positively influenced by sales to CSD, and (c) sale of surplus fat. Export sales declined 13.9% YoY due to lower coffee exports to Turkey. EBITDA grew 6.4% YoY to INR7.1b (est. INR7.2b) and Adj. PAT grew 8% YoY to INR4.5b (est. INR4.5b).
- Gross margins were down 140bp YoY to 58.3% due to higher commodity costs, particularly milk and its derivatives. Lower staff costs as % of sales (-10bp YoY to 10.5%) and other expenses as % of sales (-20bp YoY to 24.2%), led to EBITDA margin contraction of 110bp YoY to 23.6% in 2QCY19.
- Other income was up 21% YoY in 2QCY19 due to higher average liquidities.
- 1HCY19 performance: Sales/EBITDA/Adj. PAT grew 10%/5.8%/8.1%. EBITDA margin contracted 100bp YoY to 24.3%.
- Valuation and view: Nestle continues to demonstrate resilience in sales growth compared to peers. Special dividend payout of INR180 per share announced along with the results also boosts return ratios, which could move to 100% if dividend payout is increased in subsequent years. Nevertheless, management has highlighted risks posed by softening demand environment and rising commodity cost basket (1HCY19 PAT growth was only 8.1%). While longer-term narrative on topline and earnings growth remains attractive, the stock is fairly valued at 44.5x CY21EPS. Valuing the company at 45x Jun'21 EPS, we get a target price of INR10,800. Maintain Neutral.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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