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EBITDA margins expand

Nestle’s Q4CY21 revenue (up 8.4% YoY) came in line with estimates, while EBITDA (up 12.4% YoY) and adjusted PAT (up 16.6% YoY) came ahead of our estimates. Domestic sales (up 9.2% YoY) sustained good growth, largely driven by volume and mix. Nestle reported industry leading 8% YoY domestic volume and mix growth on a base of 7.8%. Sanand factory in Gujarat is now operational. Key raw materials continue to witness high inflation, with many of them at 10-year high leading to gross margin compression of 205bp YoY, but control in staff and marketing costs led to EBITDA margin expansion of 70bp YoY. Overall, innovation, premiumisation and cluster-based distribution strategy remain on track. Maintain ‘BUY’ with TP of INR22,100.

Consistent revenue growth performance

What we like: i) Industry leading domestic volume and mix growth of 8% YoY on a base of 7.8%. ii) Continuing strong growth momentum in Maggi Noodles, aided by increased availability. Iii) KitKat and Munch registering stellar growth throughout the year. iii) Nescafe Classic continues to deliver double digit growth. iv) Sanand factory in Gujarat is now operational. v) Control in staff and marketing costs led to EBITDA margin expansion of 70bp YoY. vi) Innovation as a percentage of sales is up to 4.9% in CY21, from 4.3% in CY20

What we do not like: i) Export saw decline of 6.6% due to change in product mix. ii) Gross margin saw a compression of 205bp YoY due to inflation. iii) Costs of packaging materials continue to increase amid supply constraints. iv) Rising fuel costs.

Other information: Exceptional loss was due to defined pension benefit scheme for certain class of employees.

Q4CY21 conference call key highlights

‘Project Shark’, a cost mitigation project that has helped in saving 1-1.5% of revenue in CY21. Company is targeting 120,000 villages where the population is above 2000. The company already reaches 75,000-80,000 of such villages.

Outlook and valuation: Consistent; maintain ‘BUY’

The focus on innovation, launches, market share and premiumisation is likely to boost volume-led growth. Besides, the company’s strategy—top line and market share focus—is encouraging. We retain ‘BUY/SO’ with TP of INR22,100. At CMP, the stock is trading at 64.3x CY22E EPS

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