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Key brands deliver growth; Outlook positive

Nestle India Ltd., a subsidiary of Nestle S.A., is a food processing company, primarily into manufacturing of milk products and other food products such as beverages and cereals.

* In Q2CY21, Nestle India’s standalone revenue grew 14.0% YoY to Rs. 3,477cr driven by volume and product mix. Key products posted double-digit growth on the back of improved in-house consumption.

* EBITDA rose 13.4% YoY to Rs. 848cr despite margin dropping 10bps YoY to 24.4% primarily due to increase in fuel prices. PAT improved 10.7% YoY, partly impacted by higher interest and taxes.

* Company’s strong portfolio of brands and well-spread distribution network should improve product penetration and continue to support performance. Hence, we reiterate our BUY rating on the stock with a revised TP of Rs. 19,720 based on 67x CY22E adj. EPS.

Topline growth momentum continues

Nestle India’s Q2CY21 standalone revenue increased by 14.0% YoY to Rs. 3,477cr mainly due to continued momentum in domestic sales and also due to weaker base in Q2CY20. Export sales grew 17.7% YoY (remained flat QoQ) to Rs. 157cr. Strong revenue growth was delivered on the back of improved volume and product mix. As the in-home consumption behavior trending upwards, key products such as Maggi, Kitkat, Munch etc. delivered double-digit growth aiding overall performance. Ecommerce division contributed 6.4% of total sales, improving by 105% YoY in Q2CY21.

Low employee expenses safeguard margins

In Q2CY21, company’s gross profit stood at Rs. 1,982cr (vs. Rs. 1,719cr in Q2CY20), with margin expanding by 70bps to 57.0% (against 56.3% in Q2CY20) despite commodity price inflation affecting raw material prices. EBITDA improved by 13.4% YoY to Rs. 848cr although margin remains largely stable (declined 10bps) at 24.4% (vs. 24.5% in Q2CY20). Increase in fuel expenses, CSR investments and other expenses as a % of revenue expanded by 201bps impacting overall margins, partly offset by 123bps decline in Employee expenses. Reported PAT rose to Rs. 539cr (improving 10.7% YoY from Rs. 487cr in Q2CY20) while PAT margin came out at 15.5% (vs. 16.0% in Q2CY20).

Key concall highlights

* Reiterating their commitment to India’s business, management informed that Rs. 1,000cr of their Rs. 2,600cr Capex investment plan was already invested from last year.

* Improving company’s focus on Last-mile delivery, Hyperlocal (quick commerce) channels grew at 147% in 1HCY21.

Valuation

Nestle’s brand presence and expanding distribution network coupled with its strong packaged food portfolio could continue to drive momentum in its topline. While raw material price volatility and related uncertainty could impact margins, we expect the company’s cost control strategies could play offsetting role to some extent. As in-home consumption increases, we expect Nestle is well-placed to capture the opportunity and could do well over medium-to-long term. Hence, we reiterate our BUY rating on the stock with a revised TP of Rs. 19,720 based on 67x CY22E adj. EPS.

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