Margin dip key negative in Q4CY18 results; FY19-21e earnings down 2-4% on lower-than-expected margins; TP raised to Rs 12,000 from Rs 11,600
NEST’s Q4CY18 revenue (up 11.4% y-o-y) was broadly in line, but Ebitda (down 4.8% y-o-y) and reported PAT (up 9.6% y-o-y) were much below expectations. The key negative was margin, which dipped 361bps y-o-y on account of higher investment to support new and existing products. While higher A&P might restrict the pace of near-term margin expansion and stock upside, we believe it is welcome, long-awaited and vital for healthy medium term top-line growth. Maintain Buy.
Domestic sales, steady performance: Nestle’s domestic sales grew 12% y-o-y in Q4CY18 on a base of 16% y-o-y. This growth was volume-led and broad-based across segments. In our view, volume growth is in the range of 8-9%. HUVR reported domestic consumer growth of 13% y-o-y during Q3FY19.
Exports drag overall growth: Exports (7% of total sales) were soft and flattish y-o-y during Q4CY18 (base quarter saw 13% y-o-y growth in exports). Growth was impacted due to lower exports to Bangladesh and UAE.
Margins surprised negatively: Nestle saw gross margin expansion of 5bps y-o-y but this dipped 77bps q-o-q. Ebitda margin, however, declined by 361bps y-o-y due to 402bps y-o-y increase in the other expenses, due to higher advertisement spends. Nestle has increased investment in both new products [we are witnessing high media spends by Nestle on breakfast cereals (Nesplus especially on television)], Nescafe E Smart coffee Machine (digital medium) and existing products [especially Maggi and chocolate portfolio (led by Munch and Kitkat)].
Commentary: In press release, management highlighted that the company saw doubledigit growth in almost all categories. Prepared dishes (led by Maggi), beverages (led by Nescafe), chocolates (led by Kitkat and Munch) and the brand Everyday have delivered strong performance.
Estimates: We cut our earnings by 2-4% over FY19-21e on lower-than-expected margins.
PT and view: We like the improving execution of Nestle and the focus on driving volumes and top line. Although margins would see an impact in the interim, we believe it is necessary for creating new growth drivers. The entry into new categories such as breakfast cereals (scalable), premium chocolates, RTD formats, coffee machine, along with substantial investment in these, shows management’s seriousness on new categories. We maintain Buy with a revised rolled-over Mar 20e PT of Rs 12,000 (based on 47x Mar 21 EPS).