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MOSL: NESTLE INDIA (Neutral)-Sales below our estimate; gross margin pressure evident

NESTLE INDIA: Sales below our estimate; gross margin pressure evident

(NEST IN, Mkt Cap USD23.4b, CMP INR18013, TP INR18600, 3% Upside, Neutral)

 

• Sales growth of 14% YoY in 2QCY21 was lower than our expectation (+17%), given the weak base in 2QCY20 (+1.7% YoY sales growth). Two-year average sales growth slipped to 7.8%, lower than the 9-10% range seen in the preceding three quarters. Rising palm oil and packaging costs led to lower than expected operating margin, resulting in a 5-6% miss to our EBITDA and PBT estimate.
• The company indicated in its press release that it has already invested INR10b of the INR26b capex program it had indicated earlier (planned over 3-4 years). Given the addition of only INR470m to fixed assets in its 1HCY21 Cash Flow Statement, a considerably higher investment is likely to have come through in Jul’21. While this will lead to higher depreciation in 2HCY21 and beyond, the substantial capex is indicative of the management’s confidence in NEST’s topline growth prospects.
• The structural opportunity in the Indian Food space is extremely attractive. While NEST’s ongoing investments are encouraging, valuations at 65.2x/56.2x CY22E/CY23E EPS lead us to maintain our Neutral

 

Slight miss to our estimates

• Net sales grew 14% YoY to INR34.8b (est. INR35.7b) in 2QCY21. Domestic sales grew 13.7% YoY, led by double-digit volume and mix growth. Exports rose 17.7% due to the timing of exports to affiliates. We peg volume growth at ~11% in 2QCY21.
• EBITDA/PBT/adjusted PAT increased by 9.9%/8%/5.4% YoY in 2QCY21 to INR8.3b/INR7.2b/INR5.2b v/s our estimate of INR8.7b/INR7.6b/INR5.7b.
• Gross margin expanded by 70bp YoY to 57% due to better realizations and mix, offsetting higher commodity cost.

As a percentage of sales, lower staff costs (-120bp YoY to 10.9%) and higher other expenses (+280bp YoY to 22.1%), led to a 90bp YoY contraction in EBITDA margin to 24% (est. 24.5%) in 2QCY21. Higher other expenses were mainly on account of rising fuel prices and comparison to a base quarter, impacted by restricted operations due to the lockdown.