Nestle’s Q1CY22 revenue (up 10.2% y-o-y) beat our estimate, whereas EBITDA (flat y-o-y) and PAT (down 1.3% y-o-y) belied our expectations. Domestic sales (up 10.2% y-o-y) sustained good growth, largely driven by volume and mix. Key brands such as Maggi Noodles, KitKat, Nestlé Munch, Nescafé Classic and Sunrise clocked double-digit growth. Meanwhile, key inputs such as edible oil, milk, coffee, wheat and fuel remain inflationary and, as a result, Q1CY22 gross and EBITDA margins suffered y-o-y fall of 313bp and 238bp, respectively.
Overall, although steep inflation poses a challenge, the company’s innovation, premiumisation and cost optimisation agenda would stand it in good stead. Reiterate ‘Buy’ with a revised TP of Rs 21,430.
Consistent revenue performance; costs inflationary
What we like: i) Double-digit domestic sales growth (up 10.2% y-o-y) driven by volume and mix. ii) Key brands such as Maggi Noodles, KitKat, Nestlé Munch posted double-digit growth this quarter. iii) E-commerce surged 71% y-o-y and now contributes 6.3% to domestic sales. The acceleration in e-commerce is attributable to growth being largely fuelled by new emerging formats such as ‘quick commerce’ and ‘click & mortar’. iv) Despite Covid wave 3 eating into January sales, the OOH business posted better-than-expected results. v) Strong growth momentum continued in Noodles. vi) Nutrition performed well, coupled with pricing actions.
What we do not like: i) Milk products continue to face challenges from competition. ii) Sauces and Masala-ae-Magic growth was impacted by high base and a gradual shift from in-home cooking to out-of-home consumption. iii) Gross margin and EBITDA margin fell by 313bp y-o-y and 238bp y-o-y, respectively.
Other highlights: In exports, continuous focus remains on proliferation of Indian product portfolio in new markets. In particular, the focus is on expanding new categories such as confectionery and offerings in the MAGGI range, fuelled with channel expansion in the UK and Australia.
Outlook: Consistent approach to growth
The focus on innovation, launches, market share is likely to boost volume-led growth. Given the miss on margins and persistent inflation, we are cutting TP to Rs 21,430 (from Rs 22,100) and retain ‘BUY/SO’. The stock’s trading at 57.8x CY23E EPS.
