Buy ‘Nestle’ shares with target price at Rs 11,944; new strategy is encouraging

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Published: May 16, 2019 2:31:08 AM

Nestle’s Q1CY19 revenue and Ebitda came in line with consensus estimates – up 8.9% and 5.6% y-o-y. However, PAT surpassed consensus (up 9.3% y-o-y) led by higher other income (up 29.7% y-o-y).

Buy 'Nestle' shares with target price at Rs 11,944; new strategy is encouragingBuy ‘Nestle’ shares with target price at Rs 11,944; new strategy is encouraging

Nestle’s Q1CY19 revenue and Ebitda came in line with consensus estimates – up 8.9% and 5.6% y-o-y. However, PAT surpassed consensus (up 9.3% y-o-y) led by higher other income (up 29.7% y-o-y). Though domestic sales jumped 10.2% y-o-y supported by volumes, export sales dipped 8.9% y-o-y due to lower coffee exports to Turkey.

Gross margin fell only 57bps y-o-y despite elevated input costs, thanks to the company’s superior inventory management as well as likely favourable product mix.

Ebitda margin, however, fell 79bps y-o-y on account of higher staff costs (up 12.9% y-o-y). Nestle has been posting sustained volume-led growth across product categories. Nestle has also been strengthening its position in existing brands, enhancing penetration and is in quest of constant innovations (of 39 launches, 25 have worked – a commendable hit ratio compared to Indian market’s mere 0.5%).

The company’s iconic brands such as Maggi, Kitkat and Munch delivered strong performance in Q4FY19. The company also announced it will be launching organic food products in the milk products and nutrition category in coming months. With Indian consumers increasingly becoming more health conscious, we see this gaining traction and will help Nestle further its premiumisation agenda.

Nestle’s focus on innovation, new launches, market share and premiumisation is envisaged to boost volume-led growth. Also, the company’s new strategy – top line and market share focus – is encouraging.

Rolling forward, we assign target multiple of 55x to arrive at a TP of `11,944 (`11,872 earlier). At CMP, the stock is trading at 53.2x and 45.2x CY19E and CY20E EPS, respectively. We maintain ‘BUY/SO’.

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