PL First Cut - Nestle India 2QCY23

PL First Cut – Nestle India 2QCY23 – *Amnish Aggarwal – Head of Research, Prabhudas Lilladher Pvt Ltd*

Nestle India 2QCY23: Miss on estimates; Margins improve YoY

(CMP:Rs 22281|Accumulate)

> Revenues grew by 15.1% YoY to Rs46.6bn (PLe: Rs 47.6bn) with domestic/export sales up by 14.6%/25.4%

> Gross margins expanded by 93bps YoY/101bps QoQ to 54.8% (PLe: 54.5%) due to higher net realizations

partly offset by commodity cost increases in milk and its derivatives, wheat flour, edible oil and coffee.

> EBITDA grew by 25.4% YoY to Rs10.6bn (PLe: Rs 11.1bn); Margins expanded by 186bps YoY/-25bps QoQ to 22.7% (PLe:23.4%)

> Adjusted PAT grew by 30% YoY to Rs7bn (PLe: Rs 7.3bn)

Business Update:

> Domestic sales growth is broad based and driven by healthy balance of pricing, volume, and mix.

> Strong growth across Mega cities and Metros, robust performance in Tier 1 to 6 towns and continued strength in rural markets.

> Commodities like edible oils, wheat and packaging materials have been in the lower price range. Fuels prices have softened in 2Q vs 1Q. Fresh milk has seen price stability. Robusta prices are elevated and are expected to remain volatile.

> E-Commerce contribution at 6.5% of sales.

> Received in principle approval for 10th Nestle’s tenth factory in Odisha.

Category Performance:

> Prepared Dishes and Cooking Aids: Double-digit growth driven by MAGGI Noodles and aided through distribution expansion and impactful consumer activations.

> Milk Products and Nutrition: Delivered strong double-digit growth despite inflationary pressures. Growth was driven by Milkmaid & Peptamen. The growth was further aided by the launch of Resource Fibre choice and Everyday Zero added sugar.

> Confectionery: Registered double-digit growth led by KITKAT and MUNCH supported by strong consumer engagement and media campaigns.

> Beverages: Double-digit growth led by greater household penetration NESCAFÉ Classic, NESCAFÉ Sunrise and NESCAFÉ GOLD for both hot and cold coffee occasions. Launched a cold coffee premix NESCAFÉ ALL IN 1 FRAPPE.

> Pet Food: Division continues to provide complete nutrition for cats and dogs. ‘Felix’ has received positive feedback from trade & cat parents.

View:

NEST reported strong double digit growth across all product categories supported by broad-based growth across urban & rural markets. However, we estimate volume growth to be in low single digit vs our expectation of mid-single digit. Overall commodity basket appears to be softening, which should help build back margins in subsequent quarters. We have an ACCUMULATE rating on the stock with a TP of Rs22600.

Stock trades at 63.4x CY24 EPS