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Robust growth across categories

About the stock Nestlé India (NIL) is the largest food company in India with over | 16000 crore of sales. It is broadly present in infant & baby food products, noodles, chocolates & beverage categories. In the last five years, the company has forayed into newer categories and launched more than 110 new products.

                  • The company has nine manufacturing facilities including newly commissioned plant in Sanand, Gujarat. Its major brands include Maggi, Nescafe, KitKat, Cerelac among others

Q1CY23 Results: Nestlé India reported robust growth across segments

                 • Sales were up 21.3% YoY led by a mix of volume & pricing growth

                 • EBITDA was at | 1095.5 crore, up 18.5% YoY with margins at 22.8%

                 • Adjusted PAT was at | 736.6 crore (up 23.9% YoY)

What should investors do? Nestlé India’s share price has given a return of 128% in the last five years (from | 9062 in April 2018 to | 20659 in April 2023).

               • We remain positive on growth prospects factoring in 11.7% revenue CAGR along with 260 bps operating margin expansion in next two years

               • We maintain our HOLD rating on the stock

Target Price and Valuation: We value the stock at | 23000, valuing the business 65x CY24 earnings

Key triggers for future price performance:

       • The company is undertaking a capex of | 5000 crore in the next three years to expand the capacity of its existing products. Many of its plant’s capacity utilisation has reached their peak

      • NIL is increasing its rural footprint from 80,000 villages to 1.2 lakh villages in the next two years. We believe distribution expansion in rural India (contributes 20% to sales) is driving growth in core categories

       • Palm oil, crude & wheat prices have declined significantly from their peak. Milk & coffee prices have remained elevated & would continue to remain firm in CY23. However, we believe gross margin has bottomed out in CY22. We expect a 260 bps      gross margin expansion in the next two years

Alternate Stock Idea: We like Tata Consumer Products in our FMCG coverage.

     • Strong innovation & premiumisation strategy in salt and tea is expected to drive margins in these established categories. Newer categories like pulses, spices and dry fruits to drive volume growth given large opportunity size We value the stock at |    950 on ascribing 52x FY25 earnings multiple

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