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Add Nestle India Ltd For Target Rs. 20,327

Marginal disappointment on growth but strong outlook ahead; reiterate ADD

Result Highlights

* Results summary - Nestle numbers were marginally below expectations with revenue/EBITDA/PAT growth of 14%/13.4%/10.7% vs our expectation of 16.9%/14.5%/13.1% respectively with a resilient margin performance.

* Management commentary – Sales growth was broad-based driven by double-digit volume & mix growth led by higher in-home consumption, E-commerce channel grew by 105% and contributed 6.4% to domestic sales, recurrent inflationary trends in commodity and packaging materials were highlighted as key risks, growth led by Maggi, Kitkat, Nescafe, Milkmaid and Masala-ae-Magic, company strived to reduce disruption across trade channels by implementing ‘Telecaller model’ to take orders, Rs 10 bn out of Rs 26bn planned capex spent.

* Topline - Revenue came in at Rs 34.7bn, up 14% with broad-based 13.7% increase in domestic sales (on a base of 2.6% growth) aided by a 17.7% increase in coffee exports driven by timing of exports to affiliates.

* Margins - Gross margins improved by 70bps YoY to 57%, however, it is still lower QoQ by 150bps. Margin continue to remain impacted by consistent inflation in milk and derivative prices offset by a superior mix. EBITDA margins remained flat at 24.4% assisted by lower employee and other expenses helped by a high base.

* Earnings - PAT growth of 10.7% was impacted by higher interest costs and lower other income (fall in yields).

Valuation and view –

While the performance was soft in Q2 despite a weak base, our conviction on Nestle India as one of our top picks in the staples space remains given category tailwinds and strong innovation/distribution/premiumisation initiatives. 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. We roll over our valuations to CY23 and build in 12%/16% revenue/PAT CAGR over CY20-23E. We reiterate our ADD rating with a PT of Rs 20,327 based on 60x CY23E earnings, with premium valuation supported by high growth visibility and return ratios.

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