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Positive outlook driven by domestic sales

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 Q3CY21, Nestle India’s standalone revenue grew 9.6% YoY to Rs. 3,883cr, largely driven by domestic sales (~95% of revenue).

* Domestic sales registered growth rate of 10.1% YoY due to improved volume and product mix. Key products posted double-digit growth on the back of improved distribution drive and increased penetration.

* EBITDA rose 7.3% YoY, despite contraction in margins (-50bps YoY to 24.4%). PAT was up 5.2% YoY, impacted by higher interest and taxes.

* Company’s strong portfolio of brands and well-spread distribution network will improve product penetration and continue to support performance. Hence, we reiterate our BUY rating on the stock with a rolled forward target price of Rs. 22,150 based on 65x CY23E adj. EPS.

Double-digit growth for key products aid topline

Q3CY21 standalone revenue increased by 9.6% YoY to reach Rs. 3,883cr due to increased demand for various product segments, such as milk products and confectionary. Export sales registered slight upward trend at 1.3% YoY to reach Rs. 178cr. Expanding the reach of various products to different regions and gradual resumption of business activities led to export growth. Despite lower in-home consumption and intense competition for select products, Maggi Noodles, Kitkat, Munch and Nescafe Classic delivered double-digit growth aiding the performance.

Continued focus on enhancing margins

In Q3CY21, company’s gross profit stood at Rs. 2,163cr (vs. Rs. 2,057cr in Q3CY20), despite commodity price inflation affecting raw material prices. EBITDA improved by 7.3% YoY to Rs. 949cr, although margin shrank 50bps YoY to 24.4%. Adj. PAT rose to Rs. 618cr, registering an improvement of 5.3% YoY. Company continued to increasingly focus on enhancing distribution channel to the rural areas, which led to lower delivery time and improved customer experience. Amid an inflationary scenario, company plans to achieve cost efficiencies to expand margins in the coming quarters.

Key highlights in the quarter

* Nestle is focusing on the expansion in production capacity; the company opened a new factory at Sanand in the State of Gujarat.

* Increasing raw material prices could have an impact on margins, however this could be offset partially by improved cost efficiencies. The announcement of scrapping import duties on edible oils beyond March 2022 is expected to reduce inflationary pressures from next year onwards.

* Board approved a second interim dividend of Rs. 110/share this quarter, amounting to Rs. 1,061cr.

Valuation

Nestle’s product portfolio along with increased demand for certain products led to growth in Q3CY21. Reduced intensity of the pandemic and enhanced vaccination coverage should benefit organized trade. Recovery in business activities to prepandemic levels will support the Out of Home channel.

This along with demand for packaged foods, increased focus on distribution and e-commerce channels are expected to support company performance in upcoming periods. Hence, we reiterate our BUY rating on the stock with a rolled forward target price of Rs. 22,150 using a target multiple of 65x CY23E adj. EPS.

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