Double-digit growth in domestic revenue yet again; firm’s strategy panning out well; TP cut to Rs 21,110 due to margin miss; Buy retained
Nestle posted Q4CY20 revenue (up 9% y-o-y) in line with our estimate, but undershot on Ebitda (up 10.3%) and PAT (up 2.2% y-o-y). Domestic sales (up 10.1% y-o-y) sustained the double-digit growth trajectory and outperformed peer Britannia’s uptick of 6.1% y-o-y. Exports worsened sequentially due to lower coffee exports: down 7.7% y-o-y in Q4CY20 compared with 9.4% y-o-y growth in Q3CY20. With the economy opening up, demand in out-of-home channels continues to improve. Nestle’s high innovation and ‘premiumisation’ agenda and cluster-based distribution strategy are on track, and we believe this will sustain. Maintain Buy with TP of Rs 21,110.
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Revenue robust; high staff costs negate strong gross margin
For CY20, the company delivered y-o-y domestic/total sales growth of 8.5%/ 8.1%. For Q4CY20, the company posted domestic revenue growth of 10.1% y-o-y thus delivering double-digit domestic revenue growth for 12 of the past 13 quarters. Domestic sales growth is largely driven by volume & mix and is broad based.
Benign raw material prices, particularly those of milk and milk derivatives, led to a second consecutive quarter of gross margin expansion (up 231bps y-o-y). This, however, didn’t translate into strong Ebitda margin expansion as staff cost spiked 150bps y-o-y on account of higher incentives in the wake of Covid-19 and finalisation of long-term compensation arrangements for most factory employees.
Innovation and premiumisation thrust continues
Nearly two-thirds of key brands such as MAGGI Noodles, KITKAT and NESCAFÉ Classic posted y-o-y double-digit growth in CY20. Nestle’s innovation and renovation pipeline continued to be a thrust area in categories such as Foods, Breakfast Cereals and Nestlé Health Sciences. E-commerce continued to grow (up 111% y-o-y); it now contributes 3.7% of domestic sales, and we expect this to continue to inch up.
Outlook: Best quality; maintain ‘BUY’
The focus on innovation, launches, market share and premiumisation is likely to boost volume-led growth. Considering the miss on margins, we are revising down the TP to Rs 21,110 (earlier: Rs 21,796) and retain ‘BUY/SO’. The stock is trading at 57.1x CY22e EPS.