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Show of resilience continues with another quarter of double digit domestic growth

Result Highlights  

* Results marginally ahead of expectations  ‐ Nestle numbers were marginally ahead of expectations with sales/EBITDA/PAT growth of 8.6%/17.2%/14.6% vs our expectation of 9.8%/14.6%/14.2% respectively with a much better than expected margin performance offsetting soft export revenues.

* Management commentary – Sales growth was broad‐based driven by combination of volume and mix with higher in home consumption driving double‐digit growth, E‐commerce channel grew by 66% and contributed 3.8% to domestic sales, the company alluded to recent sharp inflationary trends in commodity and packaging materials as a key risk, growth led by Maggi, Kitkat, Nescafe, Milkmaid and Masala‐ ae‐Magic.

* Topline ‐ Revenue came in at Rs 36.1bn, up 8.6% with broad‐based 10.2% increase in domestic sales (on a base of 10.7% growth) partially offset by a 12.9% decline in coffee exports. Demand for out of home channel improved but still remains impacted by COVID.  

* Margins ‐ Gross margins improved sharply by 220bps to 58.5% led by lower milk and derivative prices and a superior mix. EBITDA margins improved by 190bps to 25.8% (our expectation of 24.9%) despite a significant step up in marketing spends given controlled employee costs.  

* Earnings ‐ PAT growth of 14.6% was impacted by higher interest costs and lower other income (fall in yields).

* Dividends  ‐ The company maintained its generous dividend payouts with an interim dividend of Rs 25, which would keep up the return ratios.

Valuation and view –

With anotherresilient performance from Nestle despite a strong base, our conviction on Nestle India as one of our top picks in the staples space increases further. Our key investment thesis of sustained double‐digit domestic growth and premiumization potential of its categories, opportunities for further deepening distribution especially in rural markets and aggression on new launches and marketing spends remains intact. The stock is currently trading at 57x CY22E earnings and we reiterate our ADD rating with a PT of Rs 18,000 based on 60x CY22E earnings, implying an upside of 5.3%.

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