Impressive double-digit sales growth; several levers to support growth; ‘Buy’ retained
Nestlé’s current price builds in long-term earnings growth of c12.6%, which we see as undemanding given the size of the growth opportunity for its products.
Q3CY20 results beat expectations: (i) Nestlé’s domestic sales rose 10.2% y-o-y, led by both volume and mix. Export sales rebounded sharply, rising 9.4% y-o-y (vs c9% decline in Q2); (ii) brands with higher in-home consumption, such as Maggi and Nescafe, witnessed robust growth. Out-of-home channels improved sequentially but remained impacted; (iii) overall, net sales rose 10.2% y-o-y (consensus expected 5-7% growth), Ebitda rose by 17.6% y-o-y, aided by c50bps gross margin expansion and lower overhead costs. Higher staff costs (up 14.8% y-o-y) were due to COVID-19 incentives. Pre-tax income was up 12.4% y-o-y; (iv) the e-commerce channel sales rose 97% y-o-y; (v) Nestlé announced its capex plan of Rs 26 bn over the next three to four years to augment capacity; and (vi) it announced an interim dividend of Rs 135/share.
Several levers to support growth: (i) Nestlé’s return to double-digit sales growth, after a quarter of disruption, highlights the strength of its brand and operational efficiency. As the out-of-home channel further normalises, it would give further fillip to Nestlé’s growth; (ii) we also expect Nestlé to benefit from higher demand for ready-to-cook food in a post-COVID-19 era; (iii) Nestlé’s capacity expansion plans, along with product launch momentum, paves the way for stronger medium-term expectations; and (iv) overall, we have pencilled in CY20e revenue growth of c8.7% and income growth of 9.5% y-o-y. We expect a full recovery in CY21e and model PAT growth at c25%.
Why investors should stay positive: (i) Structurally, we view Nestlé as a proxy on growth in Indian consumption as per-capita incomes increase; (ii) Nestle’s volume and premiumisation-led strategy is delivering results; (iii) with a product portfolio and product strategy that focuses on nutrition, health and wellness, we think Nestlé is well positioned to sustain strong growth in the long term; (iv) it is also deepening its rural presence through Low Unit Packs and focussed innovation; and (v) having underperformed in the risk-on rally, Nestle looks well positioned with strong earnings momentum as the risk-on stance of the market recedes.
Retain Buy and TP of Rs 20,000: Nestlé’s current price builds in long-term earnings growth of c12.6%, which we see as undemanding given the size of the growth opportunity for its products.