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Hold Nestle India Ltd For Target Rs. 19300 - ICICI Direct

Rural expansion; capacity addition to drive growth

Nestlé India (NIL) reported a healthy set of numbers with 8.6% revenue growth contributed by 10.2% domestic sales growth. Some brands like Maggi Noodles, KitKat, Nescafe Classic, Milkmaid, Maggi Sauces & MasalaAe-Magic witnessed strong double digit growth. Post pandemic, ecommerce channel has been growing strongly for the industry and remained prominent growth channel with 66% growth in Q1 for the company. It is contributing 3.8% to sales. Gross margins expanded 223 bps mainly due to lower milk prices. It is important to note that milk procurement prices in base quarter saw exorbitant increase. Employee spend was lower by 58 bps (as percentage to sales) whereas overhead spends were up 131 bps (as percentage to sales). Operating profit increased 17.3% to | 930.6 crore. Operating margins increased 191 bps to 25.8%. PAT increased 14.6% to | 602.2 crore. The company declared an interim dividend of | 25/share.

Rural distribution expansion important for growth

NIL saw muted 2.6% volume growth in CY20 despite most packaged food categories seeing stronger growth in a pandemic year. We believe it could not fully capture the strong rural growth last year. In the last five years, NIL has expanded its rural distribution to 0.9 lakh villages and is looking to further expand its rural reach to 1.2 lakh villages by 2024. Moreover, it is also looking to expand its product range availability in rural India. The other important aspect for growth remains new product launches. We believe NIL would be able to continue its new product innovation with 40-50 new products in pipeline. We expect 10.2% revenue CAGR in CY20-22E on the back of new product launches, distribution expansion

Large capex ahead; rising milk prices to pressurise margins

The company aiming to undertake | 2600 crore capex in the next three to four years. The new factory at Sanand would be commissioned by the end of the year. The new capex would be largely for existing categories like noodles, coffee & confectionary. We believe this capacity addition would help the company grow at a faster pace to capture the demand tailwinds of consumption shift towards package foods. In the near term, rising milk prices & crude based packaging material prices could adversely impact gross margins. However, we believe NIL would be able to pass on this increase with calibrated price hikes and rationalisation of other overhead costs. We expect operating margin expansion of 100 bps by CY22E.

Valuation & Outlook

NIL has been able to grow at a consistent pace in the last four years. However, volume growth has moderated to 2.6% in CY20. We believe certain supply constraints during peak of the pandemic and relatively smaller presence in rural regions impacted growth last year. However, we believe the company is well placed to capture the growth now with increasing rural presence and capacity addition in existing categories. We believe NIL would be able to maintain dividend-payout of ~80%. The stock is trading at premium valuation multiples at 67x CY21E & 60x CY22E. We maintain our HOLD recommendation with a revised target price of | 19300/share (earlier TP: | 18000).

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