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Sanand plant to aid growth of core categories…

About the stock Nestlé India (NIL) is the largest food company in India with over | 13000 crore of sales. It is broadly present in infant & baby food products, noodles, chocolates & beverages categories. In the last five years, the company has forayed into newer categories and launched more than 80 new products.

* The company has eight manufacturing facilities while a new plant in Sanand, Gujarat got commissioned during the quarter. Its major brands include Maggi, Nescafe, KitKat, Cerelac among others

Q3CY21 Results: Nestlé India reported Q3FY21 results.

* Sales were up 9.6% YoY with strong traction in core brands

* EBITDA was at | 948.5 crore, up 7.3% YoY, with margins at 24.4%

* Consequent PAT was at | 617.9 crore (up 5.2% YoY)

What should investors do? Nestlé India’s share price has given return of 180% in the last five years (from | 6869 in October 2016 to | 19278 in October 2021).  We maintain our estimates with sustainable sale growth in core brands as supply issues resolved by commissioning of new manufacturing facility

* We continue to maintain our HOLD rating on the stock

Target Price and Valuation: We value the stock at | 20450, valuing the business 65x FY24 earnings

 Key triggers for future price performance:

* The company is undertaking a capex of | 2600 crore in the next three to four years to expand the capacity of its existing products

* NIL is increasing its rural footprint from 0.9 lakh villages to 1.2 lakh villages in the next four years

* With the reduction in Covid-19 cases & vaccination drive, urban demand is likely to pick up. The product portfolio of NIL is urban centric

* Commissioning of Sanand facility would aid revenue growth in core brands given packaged foods saw high demand in the last 18 months

Alternate Stock Idea: We like Zydus Wellness in our FMCG coverage.

* It is growing at a steady pace in nascent categories with strong presence in health, nutrition space & margin expansion possibilities

* Trading at significant discount to FMCG peers. BUY with TP of | 2,800

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