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We had (recently) turned EVEN more bullish on Nestle (link) citing that it can outperform HUL in long term driven by multiple favourable factors (both extrinsic and intrinsic). We believe Nestle is once again beating peers with broad-based improving (revenue) growth trajectory. Initiatives of launching its D2C platform (mynestle) highlight its intent to (1) premiumise – Introduction of Gerber brand (in India) was an important development, and (2) further strengthening consumer engagement. The recently included Pet Care business also presents good potential. Execution on growth pillars continues.

3QCY22 good revenue performance (+18% YoY) has benefits of (1) strong recovery in large metro cities along with continued deeper expansion in lower tier towns and villages and (2) a portfolio which is better insulated to overall market slowdown (rurban distribution expansion is helping).

While margin pressure continues, some cool-off is seen in select commodities of edible oils and packaging materials. However, on milk, Nestle can see some stress at its Moga Plant due to inflationary pressure (spread of Lumpy Skin Disease impacting milk volumes in north). We believe the street will again appreciate the volume-based outperformance which Nestle is witnessing. Maintain ADD with a revised DCF-based TP of Rs21,000 (from Rs20,500).

Good broad-based top-line: Revenue was up 18.2% YoY with similar domestic sales growth trajectory. This performance was driven by volume and price-led broadbased growth – all segments reported double-digit top-line growth. Exports sales have also started to recover (after several quarters of weak performance) with 15.7% YoY growth – it is proliferating Indian product portfolio in new markets and expanding new categories. It highlighted that (1) Growth has been strong in large metros and mega cities and continued to be robust in small towns and rural markets, (2) OOH saw good growth led by several initiatives and (3) MT also witnessed strong growth.

In terms of segmental performance (3QCY22), (1) milk products and nutrition performed well with good growth also seen in Milkmaid, (2) confectionary had support from on-ground initiatives and aggressive media campaigns, (3) Maggi noodles drive good performance in Prepared Dishes and (4) Beverages saw good growth in coffee across.

Raw material pressure and cost inflation continues: Gross margin contracted 300bps YoY to 52.5% (down 110bps QoQ). Management highlighted that (1) fresh milk, fuels, grain and green coffee remain inflationary while (2) there are early signs of softening in edible oils and packaging materials.

Valuation and risks: We increase our earnings estimates by ~2% for CY23E; modelling revenue / EBITDA / PAT CAGR of 12 / 12 / 13 (%) over CY21-23E. Maintain ADD rating with a DCF-based revised target price of Rs21,000 (from Rs20,500). Key risks are consumption slowdown linked to economic performance.

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