Accumulate Nestle India Ltd For Target Rs. 2,559 - Prabhudas Liladhar Capital Ltd
NESTLE saw a decent quarter with margin beat as calibrated price hikes neutralized the impact of high inflation in coffee and cocoa. Although demand remains weak, there seems QoQ improvement across segments. Although we expect gradual pick up in volume growth, high input cost inflation in coffee & cocoa and rising competition Instant Noodles (60% of tonnage volumes) are key near- term challenges.
Long term drivers remain intact, led by 1) sustained innovation pipeline 2) focus on premiumization 3) huge scope of growth in coffee, RTD & Chocolates 4) higher growth in channels like E-Com (8.5% of sales) and MT and 5) likely benefits from capex done in past couple of years.
We cut FY26/FY27 estimates by 2.7/2.5% given 1) likely margin headwinds from high prices of key inputs like cereals, edible oil, coffee & cocoa and 2) rising competition in Instant Noodles. We rollover and increase DCF based target price to Rs. 2559 (Rs.2546 earlier). We expect back ended returns given valuations of 65xFY27 EPS. Retain Accumulate.
Sales up by 4.5%, PAT down by 4.2%: Revenues grew by 4.5% YoY to Rs55bn (PLe: Rs55.8bn) with domestic sales up 4.2% while export sales declined 8.7%. Gross margins contracted 63bps YoY to 56.2% (Ple: 55.6%). EBITDA grew by 2.9% YoY to Rs13.9bn (PLe:Rs13.12bn); Margins contracted by 39bps YoY to 25.2% (PLe:23.5%). Adjusted PAT declined by 4.2% YoY to Rs8.9bn (PLe:Rs 8.4bn). Odisha factory, with an initial investment of ~Rs9bn, is in its first phase, to manufacture products from foods (Prepared Dishes and Cooking Aids) portfolio
? NESCAFÉ delivered high double-digit growth led by pricing and continued traction in RTD segment and new customer addition. NESCAFÉ Classic, NESCAFÉ Sunrise, and NESCAFÉ GOLD, reported double-digit growth. NESPRESSO added its first outlet in Delhi.
? Confectionary grew at high-single digit in both volume and value driven by traction in KITKAT and distribution gains as India emerged as the second largest for KitKat globally. . During FY25, Nestle launched KITKAT Raspberry, MUNCH Maxx Nuts, KITKAT Salted Caramel.
? MILKMAID delivered strong growth with Nestlé a+ expanding its yoghurt range with the launch of unsweetened low fat Greek yoghurt.
? Maggi returned to volume growth with Masala-Ae-Magic demonstrating outperformance led by innovations like besan noodles.
? The Petcare business reported high double-digit growth with PURINA FELIX and FRISKIES cat food brands achieving high growth. PURINA PRO PLAN dog food continued to see traction amongst pet owners
Strong Distribution network: E-Com/Q-com growth continued to accelerate and contributed to 8.5% of domestic sales. Nestle continued to expand its global footprint by introducing new SKUs across categories to Canada, Middle East, Maldives and Papua New Guinea. while it saw a decline in North America. Commodity headwinds in green coffee impacted growth in coffee exports.
Out-of-Home (OOH) business delivered strong double-digit growth and is emerging as one of the fastest growing businesses. OOH business has recently forayed into the ‘cocoa-based spreads category’ with the launch of KITKAT Professional Spread that can be used by chefs in hot and cold dessert.
Rising RM costs can affect GM in the near term: Commodity prices continue to be firm for coffee and cocoa. Coffee prices are up 36% QoQ, Cocoa prices have corrected but remain at elevated levels. Prices continue to remain stable for edible oils while milk prices have cyclically firmed up with the onset of summers. Sugar prices are also firm and up 5% QoQ.
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