IGI Logo

Decent quarter; Outlook optimistic

Nestle India Ltd., a subsidiary of Nestle S.A., is a food processing company, primarily into manufacturing of milk products and other food products such as beverages and cereals.

* Q4CY20 standalone revenue rose 9.0% QoQ, with volumes growth and improved product mix. Yet, export sales remained subdued with a sharp decline in coffee exports to Turkey (-7.7% in Q4CY20).

* EBITDA margin expanded 60bps YoY to 22.6%, as commodity prices (Wheat, Milk, and Sugar) remained favorable, besides marketing spends spiraling with new launches.

* Moderating in-home consumption should benefit key segments while complete revival of Out-of-home consumption is expected to propel topline further in the near term. Hence, we upgrade our rating on the stock to a BUY with a rolled forward target price of Rs. 18,490 based on 63x CY22E adjusted EPS.

Strong demand boosts topline

Standalone revenue for Q4CY20 rose to Rs. 3,433cr, up 9.0% YoY (-3.1% QoQ), as domestic sales surged 10.1% YoY to Rs. 3,261cr, largely driven by volume and product mix. Export sales saw a significant decline of 7.7% YoY to Rs. 157cr, primarily affected by lower coffee exports. Demand from Out-of-home (OOH) channel improved during the quarter, while COVID-19 continued to impact its operations. E-commerce division outgrew by 111.0% (~3.7% of domestic sales). Almost 2/3rd of Nestlé’s key brands like Maggi Noodles, Kitkat and Nescafe Classic clocked double digit growth aided by high inhome consumption (~65% of domestic).

Economical commodities drive margins

Q4CY20 EBITDA rose 12.0% YoY at Rs. Rs.777cr (-12.1% QoQ) with a margin expansion of 60bps YoY to 22.6% (-230bps QoQ), as milk and its derivatives witnessed benign commodity prices for over a year. Increased A&P spends in lieu of aggressive new launches (70+ products in last 5 years) and soaring incentives in interest of COVID-19 compensation pushed other expenses by 9.9% YoY (+5.4% QoQ) and staff costs by 25.2% YoY (+9.1% QoQ) to Rs. 848cr and Rs. 403cr, respectively. Other income dropped 31.5% with dwindling yields. PAT came in at Rs. 483cr (+2.4% YoY, -17.7% QoQ) due to high income tax provisioning.

High capex to pave way for equilibrium

Nestle declared dividend of Rs. 65/share in Q4CY20. Innovation and renovation pipeline continues to be an impetus across categories like Foods, Breakfast Cereals and Nestle Health Sciences. Digitalization enabled in breakthrough innovations including launch of Ask Nestle in Hindi. It also employed a capex of Rs. 2,600cr (for next 3-4 years) to meet any anticipated demand traction through adequate supplies across its portfolio. The company is approaching towards minimalizing greenhouse gas emissions across its value chain aiming to achieve 100% recyclable/reusable packaging by 2025.

Valuation

Given increasing rural penetration, niche play, unique positioning, uninterrupted distribution, increasing utilization levels along with capacity expansion, company’s premium segments reflect high growth potential. Additionally, packaged foods segment in India proposes immense growth opportunities with youth population shifting towards health and nutrition segment. With vigorous new launches and revival of OOH segment, we expect upside potential in the stock and upgrade our rating to a BUY with a rolled forward target price of Rs. 18,490 based on 63x CY22E adjusted EPS.

To Read Complete Report & Disclaimer Click Here

For More Geojit Financial Services Ltd Disclaimer https://www.geojit.com/disclaimer 
SEBI Registration Number: INH200000345

Above views are of the author and not of the website kindly read disclaimer