Healthy topline growth; Commodity inflation impacts margins
* 3QCY19 net sales grew 9.4% YoY to INR32.2b (v/s est. INR31.9b). Domestic sales grew 10.5%, largely driven by volume and mix. Export sales declined 7.1% due to lower coffee exports to Turkey. EBITDA grew 2.4% YoY to INR7.6b (v/s est. INR8.1b); PBT grew 2.8% YoY to INR7.1b (v/s est. INR7.6b) and Adj. PAT grew 30.4% YoY to INR6b (v/s est. INR5.1b) due to lower corporate taxes.
* Gross margins were down 220bp YoY to 57.6% due to higher commodity costs, particularly milk and its derivatives in 3QCY19. Staff costs as % of sales increased marginally (+10bp YoY to 10.0%) but were more than offset by other expenses as % of sales (-70bp YoY to 23.9%). EBITDA margin contracted 160bp YoY to 23.6%.
* Other income was down 16% YoY in 3QCY19 due to lower-than-average liquidity and lower yields.
* Other highlights: Nestle has re-launched Milo MFD brand in India. The company also announced that Mr. David McDaniel will succeed Mr. Shobhinder Duggal as Executive Director- Finance and Chief Financial Officer for a term of five years starting 1st March 2020.
* 9MCY19 performance: Sales/EBITDA/Adj. PAT grew 9.8%/4.6%/15.9%.
Valuation and view:
While Nestle continues to demonstrate healthy sales growth momentum, commodity inflation has been weighing down its margins since the past four quarters. Nevertheless, we believe that the longer-term narrative on topline and earnings growth remains attractive. Current valuations of 49.8x CY21 EPS seems fair. We value the company at 50x Sep’21 EPS leading to a target price of INR14,034. Maintain Neutral.
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