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Steady performance but limited upsides

* Nestle reported a steady performance in Q1CY21 with domestic sales growing 10% to Rs34.4bn, in line with estimates. Total sales were marginally below expectations due to a 13% drop in exports. EBITDA/PAT grew 15%/14%, missing estimates by 5-7% on higher ad spends and lower other income.

* Domestic growth has been steady and seems ahead of peers (2-year CAGR of 10%), driven by strong in-home consumption trends. Lockdowns are likely to impact near-term growth, but Nestle categories are likely to be resilient, offering better growth vs. peers.

* Low input prices have supported gross margin expansion – up 220bps. Management has indicated commodity pressures ahead. However, we believe inflation in key input prices appears manageable and can be largely offset by modest price hikes.

* Recent lockdowns may impact Q2 and CY21 earnings but are likely to be temporary and should not affect our CY22-23 forecasts. At 56x CY22E EPS, the stock looks fairly valued and offers limited near-term upsides, given the lack of any potential upside to earnings. Retain Hold with a revised TP of Rs16,800, rolling forward to Jun’23E EPS.

Domestic business grows in double digits; exports decline: Nestle’s sales growth trajectory was similar to Q4CY20, with overall sales growing 8.6% to Rs36.1bn and domestic business growing 10%, led by volume and mix. Exports declined 13% on high comparables (13% growth in Q1CY20). Domestic growth was largely driven by volume and mix, with inhome consumption trends driving double-digit growth across noodles, sauces, coffee and chocolates. The e-commerce business rose 66% and contributed 3.8% to the turnover (vs. 1.9%/3.7%% in CY19/CY20). Nestle growth trends have been consistent and ahead of peers; however, we believe the company needs to step up innovation and portfolio expansion further to address the rising in-home consumption opportunities and accelerate its growth momentum.

Margins expand on benign input prices: Gross margins expanded 220bps to 58.5% (59.1% in Q4CY20) as key input prices remained soft. Operating margin expansion of 150bps was marginally lower due to higher ad spends. Management expects increasing commodity pressures ahead. While crude based inputs and palm oil have seen a sharp rise, overall inflation appears manageable with other key input prices being largely steady (Coffee/cocoa are up by 10-20% whereas wheat/sugar/milk prices are largely flattish).

Fairly valued; maintain Hold: Recent lockdowns may impact Q2CY21 and CY21 earnings but are likely to be temporary and should not affect our CY22-23 forecasts. At 56x CY22E and 49x CY23E EPS, the stock looks fairly valued and offers limited near-term upsides, given the lack of any potential upsides to earnings. We maintain Hold with a revised TP of Rs16,800, (from Rs16,200) rolling forward to Jun’23E EPS

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