IGI Logo

Strong all-round performance, valuations rich but justified; maintain ADD

Our view

This quarter was another testament of the potential of Nestle’s portfolio and margin resilience with the company delivering 8% volume growth despite the ongoing inflation and rural headwinds. Growth remains resilient given the lower 20-25% salience on rural markets and distribution efforts in semi-urban/rural markets which are driving increase in category penetration. While gross margins have come under pressure, the company has been able to offset that by strong cost controls and calibrated price hikes. Growth across segment other than the large milk/nutrition business (up only 2.6%) was very strong at 15% plus in CY21, but the company delivering 7% plus growth in that segment in 4Q was another positive takeaway. 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. Seeing this outperformance over FMCG peers, we believe NEST should continue commanding a valuation premium and should deliver steady growth 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 multiple margin levers helping keep up the margin trajectory and high dividend payouts driving up 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 Q4 performance was on expected lines with revenue/EBITDA/PAT growth of 8.9%/11.4%/16.6% driven by double-digit growth across the product portfolio except milk products.

Topline – Revenue came in at Rs 37.4bn, up 8.9% pivoted on volume and mix-led growth in domestic sales led by double-digit growth in Maggi Noodles, strong performance from Kitkat and Munch; export sales were lower by 6.6% due to inferior product mix.

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 fine tune our estimates for the CY22/CY23 performance and now build in 12%/14% revenue/PAT CAGR over CY20-23E. We reiterate our ADD rating with a revise PT of Rs 19,400 based on 60x CY23E earnings, with premium valuations supported by strong growth visibility and return ratios.

Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632

Above views are of the author and not of the website kindly read disclaimer