Volume-led resilient growth in Q4 stands out in FMCG peer group: 1) Domestic sales growth at 9.2% yoy was driven by 8% growth in volume and mix. 2) Gross margin contracted by -205bps due to high input costs, but EBITDA margin was up by 51bps to 23.2% on the back of cost controls. 3) Company expects commodity inflation to still persist in the coming quarters. 4) Overall, net sales and EBITDA were up 8.9% and 11.4% yoy, and were largely in line with consensus. Clean PAT was up 28.9% yoy and was 14% above consensus. Reported PAT decreased 20% yoy due to a one-off cost of 2.4bn (amendment in the pension scheme for some employees). 5) Nestlé announced a final dividend of65 per share, taking the total dividend to `200/sh. 2021 results and other highlights: 1) For CY21, net sales/EBITDA/Clean PAT were up 10.1% /12.2%/14.4% yoy. 2) Milk products and nutrition (its largest category) recorded modest growth of 2.6% on a high base, but also due to competitive pressure in dairy category (milk). Other categories reported double-digit growth rates in 2021 (prepared dishes and cooking aids at (+16.7% yoy), Confectionery (+20.4% yoy), and Beverages (+16.1% yoy)). 3) Growth was driven by mega cities, small towns, and villages (9-14% yoy). 4) The Sanand factory became fully operational during Q4 and helped in increasing the availability of its key products. 5) New products contributed 4.9% to domestic sales in 2021.
Why we maintain our Buy rating on Nestlé India: 1) Structurally, we view Nestlé as a proxy on growth in Indian consumption as per-capita incomes increase. 2) Nestlé’s volume and premiumisation-led strategy is consistently delivering results with leadership positions across various categories. 3) Nestlé’s strong brands, under-penetrated product portfolio, and focus on nutrition, health, and wellness make Nestlé well positioned to sustain strong growth in the long term. 4) Nestlé is also deepening its rural presence through LUPs (Low Unit Packs), focused innovation, and distribution expansion, which should also augment its growth trajectory. 5) Nestlé has lagged peers in the past year (up 6% in the last 1yr vs 8% gain in Nifty FMCG index), in part due to significant past outperformance. Nestlé’s appeal as a strong defensive with consistent growth and earnings trajectory rises in the current volatile context making risk-reward favourable.
Maintain Buy and lower TP slightly to 20,300: Nestlé India’s current price builds in long-term earnings growth of c13%, which we see as undemanding given the size of the growth opportunity for its products. We retain our Buy rating with a lower TP of20,300.
