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Managing all aspirations (quite) well – upgrade to ADD

Domestic revenue growth of 9% YoY was steady though slightly unexciting – good performance in most parts of business while infant nutrition was slightly weak. Nestle continues to benefit from (1) improved product availability and (2) deeper expansion in lower tier towns and villages. While execution on growth pillars continues, we see some near-term (increased) challenges due to inflationary RM

Our long-term positive view is intact driven by (1) structural tailwind from increasing consumer propensity to consume packaged foods, (2) continued investment behind brands, (3) renewed focus on distribution expansion, particularly rural and e-commerce and (4) significant increase in capex (Rs26bn planned over CY20-23 which is = cumulative capex of CY12-19).

Gains from (1) distribution expansion and (2) good product pipeline (premiumisation potential as consumers upgrade) are key long-term drivers for the stock. While milk products and nutrition may not be a growth driver (in the near term), we like the clarity that growth at the bottom-end should not be chased. We upgrade the stock to ADD with a TP of Rs20,000 (from Rs19,500).

Decent performance despite some miss: Revenue and EBITDA grew 8.4% and 10.2%, respectively. Domestic sales grew 9% YoY. This performance was driven by volume and mix-led broad-based growth. Exports sales saw some weakness (down 7% YoY) as the performance continues to be volatile. In terms of segment performance in CY21, prepared dishes and cooking aids reported robust growth (+16.7% YoY), confectionary (+20.4%) while beverages grew 16%. Milk products and nutrition growth was weak at 2.6%. Nestle highlighted key products such as Maggi Noodles, KitKat, Munch, Masalaa-e-Magic posted strong growth. Nestle highlighted (1) strong recovery in organised trade/MT and (2) good recovery in OOH categories. Besides increasing rural focus (highlighted in last interaction), Nestle is also ramping up focus in emerging channels of e-commerce and hyperlocal.

Multi-quarter low gross margins due to RM pressure: Gross margin contracted 226bps YoY to 56.6% (but up 114bps QoQ). Management highlighted inflation concerns for most inputs such as wheat, coffee, edible oils, dairy prices as well as packaging materials. It is looking to drive cost-control measures to partly offset inflationary impact. However, focus on costs control and operating leverage benefit aided EBITDA margin expansion of 35bps YoY to 22.1%. We note that Nestle had seen higher operating cost structures last year (including incentives to factory workers) due to Covid-led disruption. We believe Nestle could also look to rationalise marketing expenses due to inflationary pressure

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