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Growth below expectations but remains in double‐digits, focus on navigating input cost pressures, Maintain ADD

Our view

While the performance was a tad disappointing in the quarter, 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.

With confectionery and coffee segments picking up well and prepared dishes set to benefit from recent capacity expansion, we see a strong growth outlook in addition to stable profitability, with high dividend payouts driving up return ratios 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.

Result Highlights

* Results summary  ‐  Nestle numbers were below our expectations with revenue/EBITDA/PAT growth of 10%/7%/5% impacted by soft growth in prepared dishes and milk products in addition to input cost pressures.

* Topline – Revenue came in at Rs 38.8bn, up 9.6% with a 10.1% volume and mix‐ led growth in domestic sales led by the coffee and confectionery segments; export sales were up a muted 1.3%.

* Margins – Gross margins were down sharply by 240bps to 55.7% given inflation in edible oil and packaging materials. EBITDA margins, however, were down only 50bps yoy to 24.4% due to a combination of higher cost savings and lower employee costs (COVID incentives in base quarter).

* Management commentary – New digitally‐enabled Sanand factory ready, resurgence of organized trade channel with growth in mid‐twenties after a muted 2QCY21, further acceleration in e‐commerce growth; sustained growth visible from both large metros and smaller towns where the company is focusing with a relevant portfolio, enhanced distribution and localized communication.  

Valuation

We fine tune our estimates for the 9MCY21 performance and now build in 11%/15% revenue/PAT CAGR over CY20‐23E. We reiterate our ADD rating with a PT of Rs 19,689 based on 60x CY23E earnings, with premium valuations supported by high growth visibility and return ratios.

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