PL Stock Report: Nestle India (NEST IN) - Q3CY23 Result Update – Long term outlook positive - Accumulate
Prabhudas Lilladher Pvt Ltd
Nestle India (NEST IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.
Rating: ACCUMULATE | CMP: Rs23,263 | TP: Rs25,471
Q3CY23 Result Update – Long term outlook positive
Quick Pointers:
§ Low to mid- single domestic volume growth on late festival season
§ Deficient rainfall likely to impact RM pricing in maize, Coffee, sugar, spices and oilseeds, limiting incremental margin expansion.
We increase CY24/25 EPS estimates by 1.9%/0.7% and target price to Rs25471 (Rs23585 earlier) on rollover, margin beat in 3Q23 and double digit domestic sales growth (despite late festival season). NEST continues to report broad based growth across segments, markets (Metros, T1-6 cities & rural markets) and channels (MT, OOH and E-commerce). Long term growth drivers remain intact, led by 1) sustained expansion in rural reach (~20-25% of sales) 2) healthy innovation pipeline (Masala Millet and KitKat premium portfolio in 3Q23), 3) huge scope of growth in segments like coffee, RTD & Chocolates and 4) higher growth in channels like E-Com and MT and 5) strong traction in nascent Pet care segment.
We believe most of the gains from soft RM has been derived and incremental margin expansion will come at a tepid pace as shortfall in production is likely to keep prices of edible oils, Coffee, sugar, spices and wheat firm in the near to medium term. We expect volume growth to improve as Maggi LUP price revision has mostly come in the base and 4Q will also get a boost from late Diwali. LT growth drivers look intact given significant capex plans of the company. We factor in EBITDA margin expansion of 40bps beyond CY23 (23.6% with 140bps improvement). We introduce CY25 earnings estimate with 12.2% EPS CAGR over CY23-25. We expect steady returns despite rich valuations of 58.8x Sep25 EPS. Maintain ‘Accumulate’.
Sales up by 9.5%, PAT up by 20.7%: Revenues grew by 9.5% YoY to Rs50.4bn (PLe: Rs51.8bn) with domestic sales up by 10.3%. Gross margins expanded by 381bps YoY/167bps QoQ to 56.5% (PLe: 54.8%) due to higher net realizations. EBITDA grew by 21.6% YoY to Rs12.3bn (PLe: Rs 12.0bn); Margins expanded by 245bps YoY/167bps QoQ to 24.4% (PLe:23.1%). Adjusted PAT grew by 20.7% YoY to Rs8.1bn (PLe: Rs 8.0bn). Board declares a second interim dividend of Rs140/share (Rs167/share in 9MCY23). Approved a stock split 1:10.
Strong growth across key brands, input pressures set to increase: MAGGI noodles, KITKAT, MUNCH, MILKMAID, NESCAFÉ Classic, Sunrise and GOLD reported strong growth led by 1) media campaigns, 2) innovations and 3) increased engagement. NEST will continue to benefit from innovations in Metros & Tier 1 cities and sustained distribution expansion in rural India (~20-25% of sales).
Expect GM to remain range bound: NEST may see higher commodity prices across maize, sugar, oilseeds and spices due to adverse monsoons while Robusta coffee prices are elevated & are expected to remain volatile. We expect range bound GM given that ~50% of RM basket is firm and set to rise given adverse weather patterns.