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Nestle India Ltd>
  • CMP : 2,467.8 Chg : -6.40 (-0.26%)
  • Target : 23,000.0 (11.33%)
  • Target Period : 12-18 Month

25 Apr 2023

Robust growth across categories...

About The Stock

Nestlé India (NIL) is the largest food company in India with over ₹ 16000 crore of sales. It is broadly present in infant & baby food products, noodles, chocolates & beverage categories. In the last five years, the company has forayed into newer categories and launched more than 110 new products.

  • The company has nine manufacturing facilities including newly commissioned plant in Sanand, Gujarat. Its major brands include Maggi, Nescafe, KitKat, Cerelac among others
Q1CY23 Results

Nestlé India reported robust growth across segments

  • Sales were up 21.3% YoY led by mix of volume & pricing growth
  • EBITDA was at ₹ 1095.5 crore, up 18.5% YoY with margins at 22.8%
  • Adjusted PAT was at ₹ 736.6 crore (up 23.9% YoY)
What should Investors do?

Nestlé India’s share price has given return of 128% in the last five years (from ₹ 9062 in April 2018 to ₹ 20665 in April 2023).

  • We remain positive on growth prospects factoring in 10.6% revenue cagr along with 260 bps operating margin expansion in next two years
  • We continue to maintain our HOLD rating on the stock
Target Price and Valuation

We value the stock at ₹ 23000, valuing the business 65x CY24 earnings

Key Triggers for future price performance
  • The company is undertaking a capex of ₹ 5000 crore in the next three years to expand the capacity of its existing products. Many of its plant’s capacity utilisation has reached their peak
  • NIL is increasing its rural footprint from 80,000 villages to 1.2 lakh villages in the next two years. We believe distribution expansion in rural India (contributes 20% to sales) is driving growth in core categories
  • Palm Oil, Crude & Wheat prices have declined significantly from their peak. Milk & coffee prices have remained elevated & would continue to remain firm in CY23. However, we believe gross margin would bottom out in CY23. We expect 260 bps gross margin expansion in next two years
Alternate Stock Idea

We like Tata Consumer Products in our FMCG coverage.

Strong innovation & premiumisation strategy in salt and tea is expected to drive margins in these established categories. Newer categories like pulses, spices and dry fruits to drive volume growth given large opportunity size We value the stock at ₹ 950 on ascribing 52x FY25 earnings multiple

Key Financial Summary

Key Financials CY19 CY20 CY21 CY22 5 Year CAGR (CY17-CY22) CY23E CY24E CAGR (CY22-24E)
Net Sales 12,295.3 13,290.2 14,633.7 16,789.5 0.1 18,955.6 20,945.3 0.1
EBITDA 2,864.3 3,201.5 3,591.5 3,712.6 0.1 4,355.0 5,171.7 0.2
EBITDA Margin % 23.3 24.1 24.5 22.1 - 23.0 24.7 -
Adjusted Net Profit 1,969.6 2,082.4 2,320.8 2,390.5 0.1 2,891.3 3,400.8 0.2
Adjusted EPS (|) 204.3 216.0 240.7 247.9 0.1 299.9 352.7 0.2
P/E 101.1 95.7 92.9 83.3 - 68.9 58.6 -
RoNW % 101.9 103.1 104.1 87.0 - 84.5 86.5 -
RoCE (%) 56.9 54.6 57.3 54.4 - 57.0 61.6 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter

Q1CY23 Results:  Milk prices continues to hurt margins; Softening of other commodities ease pressure

  • NIL witnessed a growth of 21.3% to |4830.5 crore led by mix of volume & pricing growth. Domestic sales grew by 21.2% & exports were up by 24.9%. The company witnessed strong growth across categories. It is driving growth in export market through mainstream & ethnic channels  

 

  • Prepared dishes segment (noodles, cooking aids) continues to witness strong growth led by media campaigns. NIL is witnessing portfolio upgradation (we believe larger pack getting traction) in this category. Chocolates category growing at robust pace continuing the growth momentum         of last two years. KITKAT & MUNCH saw strong growth led by media campaign & consumer engagement.

 

  • Beverage segment witnessed a healthy growth through market share gains in Nescafe classic, Nescafe sunrise & Nescafe Gold. We believe high raw material prices also led to pricing growth in this category

 

  • Milk product category registered double digit growth during the quarter led by strong growth in MILKMAID. We believe elevated milk prices supported pricing growth in this category.

 

  • E-commerce channel is witnessing a strong growth with rapid growth in quick commerce. The company is continuing its distribution expansion in rural India with target of 1.2 lakh village expansion. The company also saw strong growth in Out of Home channel across brands

 

  • Gross margin contracted by 159 bps mainly due to higher milk prices. Though, decline in palm oil & wheat prices benefited the company during the quarter, milk remain the largest raw material for the company. Moreover, green coffee prices also remain at an elevated level. Employee & overhead spends (% of sales) were down by 56 bps & 64 bps respectively.

 

  • Operating profit grew by 18.5% to |1095.5. Operating margin contracted by 62 bps to 22.8%. Net profit grew by 23.9% to |736.6 crore led by higher operating profit, other income & lower taxation. The company has announced interim dividend of | 27/ share (on 12th April 2023).


  • The company launched new product ‘ThickenUp Clear’, a food and beverage thickener from our Nestlé Health Science portfolio. ThickenUp Clear can be used to help patients with swallowing difficulties especially in oropharyngeal dysphagia. Newly launched products ‘GERBER’ cereals & ‘CEREGROW’ grain selection also performing well for the company. In Pet Food category, the company launched new product in cat food portfolio.

Disclaimer

RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts valuation for a stock

 

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

 

 

 

Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

ICICI Securities Limited,

Third floor, Brillanto House,

Road No 13, MIDC,

Andheri (East)

Mumbai – 400 093

 

 

research@icicidirect.com

 

 

 

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