NEST Q2CY18 revenue, Ebitda and PAT came in line with our expectations. 14.5% year-on-year LTL growth in the domestic sales, which was volume-led and broad-based, highlights steady delivery. While pace of gross and Ebitda margin expansion will slow down with RM inflation pick-up, we believe the company can deliver an operating leverage-led modest Ebitda margin expansion helped by low-teens topline growth. Maintain ‘buy’ with a target price of Rs 11,800.
Nestle like to like (LTL) domestic sales growth was robust with 14.5% year-on-year growth (led by an estimated 12% year-on-year volume growth) coming on a base of 8.4% year-on-year. Traction in export business was decent which saw growth of 15.7% year-on-year though the same has come on a soft base of 12% year-on-year dip. Management has highlighted that it is witnessing broad based volume growth across categories and the overall momentum in the market sustains.
Nestle continue to remain aggressive on innovation and its focus to grow topline.
The company has entered the breakfast cereals category with the brand Nesplus (launched 4 variants), we believe that category holds strong potential provided Nestle invests behind the same.
The product was launched on the prime day sale of Amazon which helps in creating excitement behind the brand. Nestle gross margin expanded 456 basis points year-on-year, helped by soft commodity prices.
Ebitda margin expansion was sharp at 534 basis points year-on-year led by cost efficiencies as other operating expenses were down 79 basis points year-on-year.
In CY19 and CY20, we expect modest margin expansion largely led by operating leverage.
Management has cautioned about witnessing some headwinds in the commodity prices. Our RM tracker suggest that still most of the key RMs for Nestle such as milk and coffee remains benign. Still we believe amidst improving demand scenario, absence of price hikes for couple of years and given higher share of urban for Nestle, the company holds strong pricing power. We have seen some improvement in NEST in-market execution and innovations over the last 12-18 months (though more still needs to be done on core categories like infant nutrition and chocolates). While the recent sharp price up move and valuation re-rating (stock now trading at 49x CY19E PE) limit absolute upside potential in NT, we maintain our rating. Key downside risks include a sharp RM increase limiting further margin expansion.