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Volume growth healthy; margin pressures to increase

* NEST’s 4QCY21 sales were in line with our estimate. Volume growth of 9.6% in CY21 was impressive, but segmental performance (declared only at the year-end) was a mixed bag, with the largest segment – Milk and Nutrition (43% of CY21 sales) – growing 2.6% YoY as against an impressive 16-20% in the other three segments.

* While there was a sequential gross margin improvement (contrary to our estimate) leading to a margin beat, the management said further material cost pressures are here to stay for the time being and may impact CY22 margin.

* While we like the longer term investment case for NEST, driven by its high topline growth potential, expensive valuations and commodity cost concerns lead us to maintain our Neutral rating

Sales in line; margin better than expected

* NEST reported a net sales growth of 8.9% YoY to INR37.4b (in line). Domestic sales grew 9.2% YoY, led by high single-digit growth in volume and mix. Exports declined by 6.6% YoY due to lower coffee exports and change in product mix in 4QCY21

* Growth in volume and mix stood at 8% in 4QCY21.

* EBITDA/PBT/adjusted PAT grew 12.4%/12.1%/18.4% YoY to INR8.5b/INR8.4b/INR5.5b (est. INR8.1b/INR6.7b/INR5.3b).

* Gross margin contracted by 210bp YoY, but expanded by 130bp QoQ, to 57% due to higher commodity prices, particularly edible oil and packaging materials, but partly offset by better realizations.  As a percentage of sales, lower staff costs (-140bp YoY to 10.3%) and other expenses (-130bp YoY to 23.9%), led to an EBITDA margin expansion of 70bp YoY to 22.8% (est. 21.5%) in 4QCY21.

* Sales/EBITDA/adjusted PAT grew 10.2%/11%/9.6% YoY to INR147.1b/ INR35.7b/INR23b.

* The board has declared a final dividend of INR65 per share. The cumulative dividend payout for CY21 is INR200 (first/second interim dividend of INR25/INR110 per share).

Segmental highlights

* Milk Products and Nutrition (42.4% of CY21 sales) grew 2.6% YoY. Its Toddler range posted strong double-digit growth in CY21. Milk products continued to face challenges from the competition.

* Prepared Dishes and Cooking Aids (31.8% of CY21 sales) grew 16.7% YoY. Increased availability resulted in continued growth momentum in Noodles. MAGGI Masala-ae-Magic posted healthy double-digit growth. MAGGI Sauces saw muted growth due to decreased in-home consumption, a high base, and increased competitive intensity.

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