Hold Nestle India Ltd For Target Rs. 17,200 - Emkay Global
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Muted performance
* Q2CY21 performance was muted with sales growth of 14% to Rs34.7bn, marginally below our estimates. EBITDA/PAT grew 9%/6%, coming in 10-12% below expectations, as operating margins were lower due to higher input prices and overhead costs.
* Two-year sales CAGR is healthy at 7.6%, but sales have moderated qoq by ~4%, likely due to the lockdown impact. The step-up in innovation and the distribution push seem good, but are yet to drive further improvement in growth as per expectations.
* Margins have been flat over last three years and in H1CY21 as well, with Nestle continuing to focus more on growth than margins. While the increase in ad spends is positive, overall cost savings appear to be low.
* The weak margins make us cut CY21-23E EPS marginally by 2-4%. At 60x CY22E PE, the valuation is not attractive, in our view. We retain our Hold rating with a revised TP of Rs17,200 (Rs16,800 earlier), rolling forward to 50x Sept-23E EPS.
Muted margins on higher input prices and overheads: Gross margins marginally expanded by ~70bps yoy to 57% (58.5% in Q1CY21), led by favorable realization and mix, offsetting the sharp increase commodity prices. Despite the low base, EBITDA growth was muted at 9% (H1 growth: 12%). Operating margin contracted by 100bps due to higher other overhead costs at 22% of sales vs. 19% last year on restricted operations. Commodity inflation is largely driven by oils and packaging materials, while agri prices - including that of sugar, wheat and milk - are benign. Other income declined 31% due to lower yield/liquidities, resulting in a lower PAT growth of 6%.
Moderation in growth limits upsides; Hold: Overall growth trends have been largely steady. Increased in-home consumption and Nestle’s innovation and distribution push have not led to any further improvement in growth as per expectations. Weak margins make us cut CY21-23E EPS marginally by 2-4%. Retain our Hold rating with a TP of Rs17,200 (50x Sept23E EPS).
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