We maintain estimates despite another quarter of margin and PAT beat, as GP margins could begin to compress with a lag.
Q3CY18 revenues of Rs 29.4 bn (17%, is an acceleration from the c14.5% in Q2). There is a clean beat (vs. ests) of 4-5% on all lines of the P&L –revenue, Ebitda and PAT, with the revenue growth driving operating leverage. Ebitda margin of 25.2% is up 175bps. PAT of Rs 4.46 bn rose 30%.
Broad-based growth across categories
As per management, revenue growth was broad based and driven by volume growth. New innovations in the quarter included the launch of Maggi Special Masala Noodles, Maggi Dip & Spread, KitKat Dessert Delight Brownie Kubes and Nesplus (breakfast cereals range). Management targets double-digit growth and thus far, revenues are on an accelerating trend; 11% for H1CY18 followed by 17% in Q3.
We note that the quantitative impact of innovations is limited – around 25 innovations and product introductions launched between CY16-18 account for 3% of revenues (for H1CY18). But this has risen by 1.5% in
2 years—and these innovations could be the difference between 12% vs. 15% revenue growth over a 3-year time frame. It also underscores a company that is becoming more agile from an innovation perspective.
Holding estimates for now
We maintain estimates despite another quarter of margin and PAT beat (for now). There may be a possibility that GP margins could begin to compress with a lag due to increases in packaging costs and also slight inflation in soft commodities. Over CY18-20e, we forecast 16% EPS CAGR. We’ve stated that we expect volume growth to positively surprise given the focus that the mgmt has on (i) new category expansion, (ii) better speed to market and enhanced focus on regional markets through the adoption of the cluster strategy. Thus far, this appears to be playing out. If the company’s revenue growth remains on an accelerating trajectory or grows >15% (our estimates: 13.5%), we expect operating leverage to offset input cost pressures.
The cluster strategy
Mgmt approach of micro-targeting 15 clusters within India will result in product strategies, execution, decision-making to be at the cluster level. It believes it will enable the company to more efficiently reach consumers and differentiate with a sharper understanding of consumer insights. This has yielded dividends for other players – we expect it to play out for Nestle too.
We maintain our Buy rating. Key risks are rising commodity costs.