Sell Nestle India Ltd For Target Rs.15,000 - Emkay Global
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Steady but unexciting
Nestle delivered an in-line performance, with sales up 9% to Rs37.4 bn. Domestic sales grew by 9.2%, led by volume and mix growth of 8%. Adj PBT/PAT (excl exceptional of Rs2.4bn) grew by 12%/15%, with margins improving 80bps yoy on favorable comparables.
Rural growth was strong, led by distribution expansion, which is expected to continue. Growth has been healthy across town classes, with mega cities/TC 2-6 growing at 14% and villages growing at 9%. After a muted show in CY21, growth picked up in milk products in Q4.
Margins were driven by favorable comparables, including Covid incentives, in the base quarter and low marketing spends and cost savings. Management highlighted a sequential rise in input costs, which may put pressure ahead. We reduce our CY22-23 margin forecasts by 20-50bps.
Sequential deceleration seen across town classes and rising input cost pressure are key concerns ahead. We cut CY22-23E EPS by 3-4%. Retain Sell with a revised TP of Rs15,000 (from Rs16,500), based on 45x Mar’24E EPS (vs. 50x Dec’23E), factoring in higher COE.
Steady sales growth; domestic business 2-year CAGR at 10%:
Sales grew by 9% in Q4 and 10% in CY21, with domestic growth at 9.2% and 10.7%. The 2-year CAGR was healthy at 10% in Q4. Growth was largely driven by volumes and mix, which grew by 8% in Q4 and 9.6% in CY21. Exports declined 7% due to lower coffee exports and mix change. Rural growth has been strong, led by strong expansion in rural, which offset the consumption slowdown. For CY21, prepared dishes recorded 17% growth, led by Maggi noodles, while sauces saw muted growth. KITKAT and Munch led 20% growth in chocolates. Beverages grew by 16%, with Nescafe Classic growing in double digits. Milk products grew by 2.6% as they faced challenges due to competition. Nestle highlighted healthy growth across town classes, with mega cities growing by 14% in Q4 and metro/ TC1/TC2-6/villages growing by 6.3%/4.3%/13.7%/9%
Margins aided by cost savings and favorable comparables; cost pressures increasing:
Gross margins declined 210bps yoy but were up 130bps qoq. EBITDA grew by 13% to Rs8.1bn on a low base. Margins were up 80bps on lower overhead costs (up 3%), led by low marketing spends and cost savings and a 3% decline in staff costs (base qtr had one-off Covid incentives). Reported PAT declined 20% due to an exceptional item of Rs2.4bn on account of changes to the pension scheme.
Concall highlights:
Management highlighted rising inflation post Dec’21, with the commodity cost index up in high single digits. A price hike of 100-200bps has been effected. It expects a slight improvement in margins from the change in the pension scheme. Management remains optimistic about growth in milk and nutrition products. Segment growth was slow in CY21 at 2.6%, due to a high base and competition in dairy products, but it highlighted an improvement in growth in Q4. Nestle expects rural initiatives to continue and targets 120,000 with population above 2,000; 75,000-80,000 are covered, which indicates the success of its portfolio.
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