Mr. Himanshu Nayyar, Lead Analyst – Institutional Equities, YES SECURITIES

Nestle India 3QCY20 results – Growth trajectory normalizes with double-digit growth in key brands; company announces aggressive expansion plans – reiterate ADD

Beat on both topline and margins- Nestle reported a much better than expected performance with sales/EBITDA/PAT growth of 10%/15%/12% vs our expectation of 7%/12%/7% respectively.

Quarter highlights – Company has planned Rs 2600cr capex over next 3-4 years (greenfield facility at Sanand, Gujarat and augmentation of other plants), normal production has resumed at all factories, key brands have grown in double-digits led by in-home consumption, out of home demand has also improved, e-commerce sales grew 97% now contributing 4% to sales.

Topline – Revenue came in at Rs 35.4bn, up 10.1% (back to double-digit growth after a sharp decline to 1.7% in last quarter) led by double-digit growth in Maggi Noodles, Maggi Sauces, Kitkat, Munch and Nescafe. While domestic sales increased by 10.2%, export sales were also up by 9.4% after falling for last few quarters. Demand for out of home channel improved but still remains impacted by COVID.

Margins – Gross margins improved by 60bps to 58.1% led by lower milk prices despite a relatively inferior mix, while EBITDA margins improved by 110bps to 24.9% led by reduction in overhead costs due to restricted operations partially offset by higher incentives offered to production manpower.

Earnings – PBT growth of 12% was impacted by higher interest costs and lower other income (fall in yields). PAT, however, saw a decline of 1% to Rs 5.87bn due to the tax reversal in the base quarter.

Dividend – The company maintained its generous dividend payouts with an interim dividend of Rs 135 per share.

Valuation and view- We expect a positive reaction to this strong set of earnings; stock is currently trading at 52x CY22E earnings and remains one of our top picks in the staples space. We would review our estimates and call post the investor meet scheduled on 5th November. We reiterate our ADD rating with a PT of Rs 18,180 based on 60x CY22E earnings, implying an upside of 15%.

Risk – One headwind could be on account of the probable royalty caps being imposed by the government which might require the company to obtain government approvals to sustain their annual payouts.

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.





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