ICICI Direct's research report on Nestlé India
Nestlé India’s (NIL) results were below our estimates with 9% revenue, 2.2% earnings growth. Domestic revenue growth was 10.1% whereas coffee exports were down 7.7%. Demand conditions in two-thirds of its product portfolio, comprising Maggi noodles, Nescafe Classic, KitKat were strong. These brands reported double digit growth in CY20 driven by higher ‘at-home’ consumption. With significant decline in milk prices in last 10 months, gross margins expanded 231 bps. Employee spends were up 150 bps due to higher incentives in pandemic year. Though overhead spends were similar to the corresponding quarter, NIL has utilised saving in some overhead spends for higher marketing spends. It has increased A&P spends to support many news launches in last one year. Operating profit was up 14.6% to Rs 777 crore while operating margins expanded 111 bps to 22.6%. PAT rose 2.2% to Rs 483.3 crore mainly on account of higher depreciation & income tax provisioning. The company declared a dividend of Rs 65/share.
Outlook
The company is undertaking a major capex of Rs 2600 crore in the next three to four years to ensure swift supplies in case of significant demand traction in any of the categories. Our channel checks suggest NIL was facing supply constraints for Maggi noodles in Q2CY20 and Q3CY20, which could have impelled the company to undertake capacity expansion. Despite huge capex, in the next four years, we believe NIL would be able to maintain dividend-payout at 80%. The stock is trading at premium valuation multiples at 65x CY21E & 59x CY22E. We maintain our HOLD recommendation and target price of Rs 18000/share on the stock.
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