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MOSL: NESTLE INDIA (Neutral)-Sales in-line-higher ad spends impact bottom line

NESTLE INDIA: Sales in-line; higher ad spends impact bottom line; CY18 ends with negative working capital cycle after almost eight years

(NEST IN, Mkt Cap USD14.4b, CMP INR10612, TP INR11475, 8% Upside, Neutral)

 

• Net sales increased 11.4% YoY to INR29b (our estimate: INR28.8b) in 4QCY18. Domestic sales grew by 12% YoY, driven by higher volumes. Export sales were flat YoY at INR1.9b due to lower exports to Bangladesh and the UAE. EBITDA declined 4.8% YoY to INR6.1b (our estimate: INR7.2b), while adj. PAT was down 4.3% YoY to INR4b (our estimate: INR4.6b).
• Gross margin was flat YoY at 58.9% (our estimate: 59.4%). EBITDA margin, however, shrank 360bp YoY to 21.2% due to a sharp increase in other expenses, largely on account of step-up in demand-generating activities, including on new products.
• CY18 performance: Net sales, EBITDA and adj. PAT were up 12.8%, 23% and 27.5% YoY, respectively. Reported domestic sales grew 10.9% YoY, while exports increased 6.9% YoY. Gross margin expanded 260bp YoY to 59.4%, while the EBITDA margin improved 200bp YoY to 24.2%.
• Balance sheet comments: (1) CY18 ended with a negative working capital cycle after eight years – stood at negative 2 days (on average basis) v/s positive 4 days in CY17, led by an improvement in inventory and creditor days. (2) Cash + current investments were up 24% to INR35.3b at end-CY18. (3) Dividend payout remained strong at ~64% of adjusted EPS in CY18.