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Add Nestle India Ltd For Target Rs.19,387 

Resilient growth performance and outlook; maintain ADD given rich valuations and near‐term margin headwinds  

Our view

Nestle delivered strong topline in domestic business with volume growth of ~7% on base of 3.2% while margins were under pressure amidst elevated inflation across key raw materials. Growth was led by innovative campaigns, attractive promotions and tech‐led insights and distribution drives. Strong rural growth despite rural headwinds indicates strong progress on the RURBAN journey with distribution efforts in semi‐ urban/rural markets continuing to drive increase in category penetration. While gross margins have come under severe pressure, company has been able to offset that partially with strong cost controls and calibrated price hikes. Double‐digit growth across segments other than the challenging milk products business, strong 71% growth in e‐commerce business and strong recovery in Out of Home business were positive takeaways. We continue to believe that NEST’s core categories have a strong runaway for growth given scope for increase in penetration with aggressive innovations also adding to the growth. Given continued outperformance over FMCG peers, we believe NEST should continue commanding a valuation premium and should deliver steady growth in the medium term despite inflation headwinds given strong innovation/distribution/premiumization initiatives. With confectionery and coffee segments growing well and prepared dishes set to benefit from recent capacity expansion, we see continued double‐digit volume‐led growth for the company with margins expected to normalize after correcting in CY22E helping keep up the margin trajectory from CY23 onwards in addition to high dividend payouts helping sustain the strong return ratios further. But as the stock has not participated in the recent sector correction, absolute upside remains limited, hence we maintain our ADD rating on the stock

Result Highlights

Results summary  ‐ Nestle Q1 performance was slightly lower on margins front with revenue/EBITDA/PAT growth of 10.2%/‐0.6%/‐1.3% driven by high single‐ digit volume/mix growth with elevated inflation impacting margins. Company declared interim dividend of Rs 25/share

Valuation

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 cut our margin estimates for CY22 to incorporate near‐term margin headwinds and now build in 12%/16% revenue/PAT CAGR over CY21‐23E. We reiterate our ADD rating with a revised PT of Rs 19,387 based on 60x CY23E earnings, with premium valuations supported by best‐in‐class growth visibility and return ratios

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