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Nestle India - Capex announcement (Rs26bn over CY20-23) is the highlight - ICICI Securities

Posted On: 2020-10-25 23:47:49 (Time Zone: Arizona, USA)

Domestic revenue grew 10% in Q3CY20 (with ~7% volume growth (our view)), with double-digit growth in culinary (Maggi), chocolates (a positive surprise), coffee (as expected). Nestle seems to be in the sweet spot - (1) structural tailwind from increasing consumer propensity to consume packaged foods, (2) key input remaining stable and (3) significant increase in capex (Rs26 bn planned over CY20-23 which is = cumulative capex of CY12-19). Our long-term positive view is intact; however, our primary research (link) indicates likely lower birth rates in CY21, a potential headwind for its infant nutrition business in CY21. HOLD retained.

- Revenue momentum returns with improvement in supply situation: Revenue / EBITDA grew 10% / 16% YoY while recurring PAT declined 1% (due to lower tax rate in the base quarter). Domestic sales growth of 10% - we estimate ~7% volume growth. This strong performance was driven by improvement in supply situation and double-digit growth in brands - MAGGI Noodles, MAGGI Sauces, KITKAT, Nestlé MUNCH, NESCAFÉ CLASSIC & NESCAFÉ SUNRISE due to increased in-home consumption. Further, demand of out-of-home channels improved sequentially but continues to be impacted. Export sales returned to the growth trajectory (+9% YoY). E-commerce grew by 97% and contributes ~4% of domestic revenues.

- Margin expanded due to input cost deflation: Gross margin expanded 60bps to 57.9% driven by milk and milk derivatives price deflation (constitutes 51% of Nestlé's total COGS). Other expenses declined 130bps while staff cost was up 50bps. This translated into 130bps improvement in EBITDA margin, EBITDA grew 16% YoY. PBT grew 13% due to lower other income (down 30% YoY from lower yields and cash reserves post payment of special dividend in Aug'19).

- Capex announcement: Nestlé plans to invest Rs26bn over next 3-4 years towards construction of a state of art factory in Sanand, Gujarat and other facilities. A noodle factory is western India will potentially help it improve market shares (it has relatively weaker position in western India).

- Dairy prices to be deflationary for rest of CY20, likely into CY21: We note that milk procurement prices have declined 20% in April due to lower demand. We believe dairy prices are likely to be deflationary for the rest of CY20 and in 1HCY21, which together with price hikes of 3-4% in infant nutrition and 5% in Everyday dairy whitener in Dec'19 could improve margins (estimate +120bps margin expansion in CY20).

- Valuation and risks: We upgrade our earnings estimates by ~2%; modelling revenue / EBITDA / PAT CAGR of 12 / 17 / 15 (%) over CY19-21E. Maintain HOLD rating with DCF-based target price unchanged at Rs16,500. Key risks are consumption slowdown linked to economic performance and keyman risk.

Shares of NESTLE INDIA LTD. was last trading in BSE at Rs.15863 as compared to the previous close of Rs. 15911.25. The total number of shares traded during the day was 3205 in over 1461 trades.

The stock hit an intraday high of Rs. 16066.15 and intraday low of 15815.35. The net turnover during the day was Rs. 50953727.

Source: Equity Bulls

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