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Neutral Nestle India Ltd For Target Rs.18,300

Result in line; RM inflation being witnessed

* NEST delivered an in line set of 1QCY21 numbers, with overall sales growth of 8.6% (v/s our estimate of 8.5%) and domestic sales increasing in doubledigits (10.2%).

* While gross margin was in line, EBITDA and PAT were 5.2% and 3% ahead of our estimates, respectively. The management did call out sequential inflation in commodity costs, which may affect operating margin ahead.

* While longer term opportunities are attractive, valuations of 59x CY22E EPS are expensive. We maintain our Neutral rating.

Momentum in domestic sales growth continues

* Net sales grew 8.6% YoY to INR36.1b (in line). Domestic sales grew 10.2% YoY, driven by volume and mix, whereas exports declined 12.9% YoY due to lower exports to affiliates. We peg 1QCY21 volume growth at 5.5%.

* EBITDA/PBT grew 16.2%/14.2% YoY to INR9.3b/INR8.1b (v/s our estimate of INR8.8b/ INR7.8b). Adjusted PAT grew 13.1% YoY to INR6b (v/s our expectation of INR5.8b).

* Gross margin expanded 220bp YoY to 58.5% due to lower commodity prices, particularly milk and its derivatives. Decreased staff costs, as a percentage of sales (-60bp YoY to 10.2%), and higher other expenses (+110bp YoY to 22.6%) led to a 170bp EBITDA margin expansion to 25.8% (v/s our estimate of 24.5%) in 1QCY21. Higher other expenses were mainly due to higher advertising and sales promotion spends.

* Other income decreased by 30.8% YoY during 1QCY21 due to lower yields.

* The company has declared an interim dividend of INR25 per share amounting to INR2.4b.

Highlights from the management commentary

* Key products, boosted by in-home consumption, posted double-digit growth.

* Demand in the ‘Out of Home’ channel improved further in 1QCY21, but continues to be impacted by COVID-19.

* e‐commerce channel grew 66% and contributed 3.8% of domestic sales.

* Recently, the company witnessed headwinds in commodity and packaging materials costs.

* The management achieved plastic neutrality across all brands in CY20.

Valuation and view

* Continuing its impressive trend of recent years, NEST posted double-digit domestic sales growth in 1QCY21. As highlighted in our annual report note released last week, even excluding the revival from the CY15 Maggi crisis in CY16, topline and earnings growth have been impressive in the subsequent four years.

* Performance has been good all round and primacy has been given to volume-led sales growth, with ad spends consistently at elevated levels, even in CY20, v/s peers who reduced ad spends sharply.

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