Neutral Nestle India Ltd For Target Rs. 20,500 - Motilal Oswal Financial Services
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Big beat in a challenging environment; Revenue growth at a 10 year high
* NEST’s 1QCY23 numbers beat our expectations on all parameters, with overall sales growth of 21% v/s our estimate of 9%. It was driven by doubledigit growth across product categories, led by a better mix, healthy volume and better pricing, along with rapid acceleration in the out-of-home (OOH) business during the quarter.
* Gross margin contracted 150bp YoY/110bp QoQ to 53.8% and was 70bp lower than our expectation. The management commentary highlights early signs of a softening in the costs of edible oils, wheat and packaging materials, even as the costs of fresh milk, fuels and green coffee are expected to remain firm in the near-to-medium term.
* We value the stock at 55x Mar’25E EPS to arrive at our TP of INR20,500. We reiterate our Neutral stance on fair valuations.
Category performance
* Prepared Dishes and Cooking Aids: The category delivered strong growth across all products.
* Milk Products and Nutrition: It posted strong double-digit growth despite commodity pressure. MILKMAID delivered strong growth. GERBER Cereals and CEREGROW Grain Selection performed well.
* Confectionery delivered robust growth, driven by KITKAT and MUNCH.
* Beverages: NESCAFE recorded its highest-ever market share. NESCAFE RTD and OOH delivered strong growth.
* Pet Foods: Launched a new product in cat’s portfolio.
Key highlights from the management commentary
* It achieved the highest revenue growth for any quarter in the last 10 years (ex 3QCY16, due to exceptional low base in 3QCY15).
* Out?Of?Home (OOH): It posted a strong performance. Growth has been secular across brands, geographies, and channels.
* E-commerce delivered strong performance, with significant growth in quick commerce.
* Costs of fresh milk, fuels, and green coffee are expected to remain firm because of a continued increase in demand and volatility.
* RURBAN growth was complemented by strong momentum in metro and mega cities, along with strong growth in rural led by volumes.
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