Nestle India rating – Buy: Growth was sustained in Q3CY21

By: |
November 01, 2021 2:45 AM

Domestic sales impressive; structurally, a long-term growth story; TP raised to Rs 20,800; ‘Buy’ maintained

Nestlé has lagged peers (up 5.7% ytd 2021 vs 22% gain in Nifty FMCG index), and as the market becomes volatile, Nestlé’s appeal as a strong defensive with robust earnings outlook rises. We think risk-reward is quite favourable.Nestlé has lagged peers (up 5.7% ytd 2021 vs 22% gain in Nifty FMCG index), and as the market becomes volatile, Nestlé’s appeal as a strong defensive with robust earnings outlook rises. We think risk-reward is quite favourable.

Growth sustained in Q3: (i) Domestic sales growth at 10.1% y-o-y was impressive, driven by high single-digit growth in volume and mix. (ii) Growth was broad-based, with key categories across confectionaries (Kitkat, Munch, Milkybar), Nescafé Classic, Milkmaid and the toddler range (Ceregrow, Nangrow) growing by strong double digits. (iii) Gross margin contracted (-239bp) due to higher raw material and packaging costs. However, Ebitda margin decline was lower (53bp y-o-y) to 24.4%, aided by strong cost controls. (iv) Overall, Q3CY21 net sales/Ebitda/PAT were up 9.6%/7.3%/ 5.2% y-o-y, respectively, and largely in line with consensus. (v) Nestlé announced interim dividend of Rs 110 per share.

Key highlights: (i) Nestlé achieved double-digit growth both in metros, as well as across small towns. This further highlights significant opportunity for Nestlé to unlock value in rural areas, where it is considerably underpenetrated. (ii) Among distribution channels, modern trade rebounded to register strong growth in mid-twenties as the pandemic situation eased in Q3. E-com continued to see accelerated growth. (iii) Out of Home (OOH) portfolio reached pre-pandemic levels in certain geographies and channels. (iv) Input cost environment remains inflationary, and Nestlé intends to mitigate its impact through cost optimisation and efficiencies. (v) Nestlé’s state of the art factory in Sanand became operational during the quarter.

Long-term structural appeal for Nestlé is broadly uncontested: (i) Structurally, we view Nestlé as a proxy on growth in Indian consumption as per-capita incomes increase. (ii) Nestlé’s volume and premiumisation-led strategy is consistently delivering results with leadership positions across various categories. (iii) Nestlé’s strong brands, under-penetrated product portfolio, and focus on nutrition, health, and wellness, make it well positioned to sustain strong growth in the long term. (iv) Nestlé is also deepening its rural presence through LUPs (Low Unit Packs) and focussed innovation, which should also augment its growth trajectory. (v) Nestlé has lagged peers (up 5.7% ytd 2021 vs 22% gain in Nifty FMCG index), and as the market becomes volatile, Nestlé’s appeal as a strong defensive with robust earnings outlook rises. We think risk-reward is quite favourable.

Maintain Buy: Nestlé’s current price implies long-term earnings growth of 13-14%, which we see as undemanding. We include Q3CY21 results in our model, marginally adjust our long-term estimates, and roll over our valuation base to October 2021 from July 2021. As a result, our DCF-based TP rises to Rs 20,800. We retain Buy as we believe Nestlé, with a product portfolio focussed on nutrition, health, and wellness, is well-positioned to sustain strong growth in the long term.

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