Published on 24/11/2020 12:31:48 PM | Source: HDFC Securities Ltd

Buy Nestle India Ltd For Target Rs.18,900 - HDFC Securities

Posted in Special Event Reports| #FMCG #Nestle India Ltd #HDFC Securities #Company Result

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Buy Nestle India Ltd For Target Rs.18,900 - HDFC Securities

Our Take:

Nestle India Ltd, one the biggest players in FMCG segment, has a presence in milk & nutrition, beverages, prepared dishes & cooking aids & chocolate & confectionery segments. The company is engaged in the food business. Nestle India manufactures and sells products with brands such as Nescafe, Maggi, Milkybar, Milo, Kit Kat, Bar-One, Milkmaid and Nestea. Products of daily consumption and use include Nestle Milk, Nestle Slim Milk, Nestle Fresh 'n' Natural Dahi and Nestle Jeera Raita, Nestle Everyday Dairy Whitener and Nestle Everyday Ghee. Beverages Include Nescafe Classic, Nescafe Sunrise Premium, Nescafe Sunrise Special and Nescafe Cappuccino. Nestle India is a subsidiary of Nestle S.A. of Switzerland. The company has presence across India with 8 manufacturing facilities and four branch offices spread across the region. The four branch offices in the country help facilitate the sales and marketing of its products. Nestle has announced a capex of Rs 2600 cr over the next 4 years with plans to increase the existing manufacturing facilities and including new under-construction facility (Rs700 cr capex) at Sanand, Gujarat. Nestle is engaging in such large capacity addition after almost 7-8 years.


Valuations and Recommendations:

Nestle is a market leader in most categories it is present and hence is one of the most expensive FMCG companies in India. However, we believe the company will always demand a premium compared to its peers due to certain moats. The company is an undisputed leader in many categories like infant formulations where there is very little or no competition. At the same time, regulatory restrictions on advertising such products means it is very difficult for new players to enter and gain share in the market. The domestic consumer associates the noodles category to a brand like Maggi. Nescafe has been the leader in coffee space in India for years. Due to these reasons, Nestle has managed to grow in double digits compared to low single digit growth of the industry. Nestle also has a vast global portfolio which it can leverage and enter new categories in India in the future. For eg. Ice Creams, Petcare, Healthcare Nutrition, Cullinary, Chilled and Frozen Foods, and Bottled Water. The company is constantly innovating with new products which has led to growth outperformance. In all, Nestle had 61 new launches since 2016, of which 70% have been successful. New innovations are estimated to have contributed between 3-4% to domestic sales in CY19 alone. Owing to these factors, we believe Nestle to be a long term compounding story as penetration levels are still low in rural regions which still have a significant presence of unorganized players. Covid related lockdown and confined living have triggered rise in penetration and product trials. This can drive higher consumption of packaged foods.

We feel investors can buy the stock on dips in the Rs.15900-16100 band (55.0xCY22E EPS) and add more on dips to Rs.14850-15050 band (51.5xCY22E EPS). We think the base case fair value of the stock is Rs.17450 (60.0xCY22E EPS) and the bull case fair value is Rs.18900 (65.0xCY22E EPS) over the next two quarters.


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