NEW DELHI: Brokerages had a lukewarm response to Nestle India’s third quarter earnings in which the company surprised analysts with its double digit revenue growth, but the upside in share prices seem to be limited.

A number of domestic and global brokerages including Nomura, IDBI Capital, Emkay Research and Prabhudas Lilladher, upgraded their ratings on the FMCG major but are concerned about its rich valuation.

“We believe the strong revenue growth and margin expansion would continue, going forward, given the slew of new launches is increasing the contribution to sales and benign commodity prices scenario is here to stay. The stock is trading at premium valuation multiples,” said Sanjay Manyal of ICICI Securities who has a hold rating on the scrip with target at Rs 18,000, which means an upside of 13 per cent.

For July-September period, the company reported 1.37 per cent year-on-year fall in net profit at Rs 587.09 crore. Revenue of the company increased 10 per cent YoY to Rs 3,541.70 crore. Nestle India has also declared an interim dividend of Rs 135 per equity share.

Nomura, which upgraded the stock to ‘buy’, said it believes Nestle’s massive capex plan of Rs 2,600 crore over the next 3-4 years towards augmenting existing capacities and construction of the Sanand factory (exclusively for Maggi production) will likely propel revenues to a higher plane in the medium to long term.

It has a target of Rs 18,925 (potential upside of 19 per cent) on the Maggi maker, as it sees current valuations as favourable. However, it counts slower demand in core products as a key risk to the target price.

Analysts said company’s revenue growth was driven by a rise in at-home consumption while out-of-home consumption also saw improvement. There was strong growth in tier 2, tier 3 cities and sale through e-commerce platforms also helped the cause.

“The company resumed double-digit sales growth, which appears likely to sustain given the continued benefits of an in-home consumption boost. Lower milk, wheat, and sugar costs also led to sequential gross margin improvement. Consequently, Ebitda also grew in double-digits, a first after seven quarters,” said Krishnan Sambamoorthy, a research analyst at Motilal Oswal.

While the structural investment case is strong, valuations of 64.9 times CY22 and 55.9 times CY23 EPS do not offer any material upside potential from a one-year perspective, Sambamoorthy said. He maintains a ‘neutral’ stance on the stock with a target at Rs 16,440, which translates into a potential upside of 4 per cent.

The initial reaction to the earnings was encouraging as shares of the company were trading 2.36 per cent higher at Rs 16,236.90 in Monday trading.

IDBI Capital has ‘accumulate’ rating while Emkay and Prabhudas Lilladher advise ‘holding’ the scrip as they also see a negligible upside from a one-year perspective.





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