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Good outcome of sustained growth momentum

Domestic revenue growth of 10.2% YoY is steady in the current context and places Nestle ahead in the list of likely (volume) outperformers. It continues to benefit from (1) improved product availability, (2) deeper expansion in lower tier towns and villages and (3) higher urban salience. While execution on growth pillars continues, we see some near-term (increased) challenges due to inflationary raw materials. We believe the street will again appreciate the volume-based outperformance which Nestle is witnessing – between Sept’18-Dec’19, Nestle outperformed most FMCG companies by >40% (refer chart 2-3). In our opinion and interpreting management commentary, Coffee, Chocolates, Maggi grew in mid-to-high teens, Everyday diary whitener volumes continue to decline as milk availability in North East has improved, in our view. Nutrition volumes are likely flat. ADD; TP Rs19,500.

Good performance with a likely volume outperformance: Revenue was up 9.7% YoY with domestic sales growth of 10.2% YoY. This performance was driven by volume and mix-led broad-based growth. Exports sales saw some weakness (down 1% YoY) as the performance continues to be volatile. Nestle highlighted key products such as Maggi Noodles, KitKat, Munch, Nescafe Classic and Sunrise posted strong (double-digit) growth. Besides growth was broad-based in most categories. 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.

* Raw material pressure continues with further decline in gross margins: Gross margin contracted 335bps YoY to 55.1% (down 160bps 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. Management highlighted use of all levers including scale, efficiencies, mix and pricing. EBITDA margin contracted 274bps YoY to 22.8%.

* Valuation and risks: We cut our earnings estimates by ~8-7% for CY22E-23E; modelling revenue / EBITDA / PAT CAGR of 12 / 13 / 13 (%) over CY21-23E. Maintain ADD rating with a DCF-based revised target price of Rs19,500 (was Rs20,000 earlier). Key risks are consumption slowdown linked to economic performance.

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