Nestle India rating: Buy; revenues in line, margin slipped in the quarter

By: |
February 22, 2021 4:00 AM

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

Shares of Nestle India Ltd on Tuesday settled at Rs 17,086.25 on BSE, down 0.02 per cent from the previous close.Shares of Nestle India Ltd on Tuesday settled at Rs 17,086.25 on BSE, down 0.02 per cent from the previous close.

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.

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.

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