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Maintain REDUCE on Nestle India - In-line result; steady recovery - HDFC Securities

Posted On: 2020-10-26 04:37:14

Mr. Varun Lohchab, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

Nestle's 3QCY20 was healthy as the company clocked 10% YoY growth (HSIE 8%). Packaged food category has done well, and Nestle's performance in the past two quarters was steady (6.5% YoY growth). Maggi, Kitkat and Nescafe (in-home consumption) posted double-digit growth. Exports also bounced back with 9% YoY growth. GM expansion was slower at 54bps YoY (58.1%). Cost control initiatives led to EBITDA growth of 16.5% (HSIE 16%). We expect Nestle's recovery to be steady, and we maintain our EBITDA estimates. As the increase in Capex has resulted in lower other income, we cut our EPS estimate for CY21/CY22 by 3/3%. The stock is trading at 60x P/E on CY21 EPS and limits absolute upside in the medium term, making the risk-reward unattractive. We roll forward our target price to Sep-22E EPS and value Nestle at 50x P/E to derive a TP of Rs 14,080. Maintain REDUCE.

Healthy revenue growth: Revenue grew by 10% YoY (+11% in 3QCY19 and +3% in 2QCY20) vs the expectation of 8% YoY growth, driven by volumes and product mix. Domestic revenue grew by 10% YoY while Exports saw 9% YoY growth. Out of home consumption continued to remain muted. E-commerce channel was up 97% YoY (4% of domestic revenue) as MT continued to struggle during the quarter.

Margins in-line: GM expanded by 54bps YoY (-216bps in 3QCY19 and - 193bps in 2QCY20) missing our expectation of +145bps YoY expansion. Employee/Other expenses grew by 15/5% YoY. EBITDA margin saw an expansion of 140bps YoY to 25.6% (-118bps in 3QCY19 and +130bps in 2QCY20), vs our estimate of 172bps YoY expansion. EBITDA grew by 16.5% YoY (HSIE 16%). PBT clocked 12% YoY growth while PAT declined by 1% YoY due to lower tax rate in the base quarter.

Press release takeaways: (1) Out of home demand showed improvement during the quarter; (2) Nestle plans to invest Rs 26bn over the next 3-4 years in manufacturing facilities in India; (3) the company declared an interim dividend of Rs 135 per share.

Shares of NESTLE INDIA LTD. was last trading in BSE at Rs.16256.2 as compared to the previous close of Rs. 15863. The total number of shares traded during the day was 10044 in over 3424 trades.

The stock hit an intraday high of Rs. 16375 and intraday low of 16053.85. The net turnover during the day was Rs. 162864962.

Source: Equity Bulls

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