EQUITIES

Nestle India Rating: BUY; a standout performance by company

Nestle India Rating, nestle Q1CY20 revenue, ebitda margin, coffee exports, FMCG company, maggi,kit kat, Nestlé MUNCH

Nestle’s Q1CY20 revenue, Ebitda and PAT growth of 10.8%, 5.3% and 13.4% y-o-y surpassed our estimates. This was the tenth consecutive quarter of double-digit domestic sales growth—up 10.7% y-o-y—largely riding volume and mix. Exports revenue grew 12.9% y-o-y for the first time in five quarters as lower coffee exports to Turkey are now in the base. High commodity prices continued to drag gross margin (down 223bps y-o-y). Cost control—a likely cut in ad spends (other expenditure down 168bps y-o-y)—aided Ebitda margin a tad, which dipped only 125bps y-o-y.

That said, Nestle continues to outperform peers and is likely going to be the only FMCG company to report positive domestic sales growth in Q1CY20. Its high innovation & premiumisation agenda and cluster-based distribution strategy are also on track, and we believe this will sustain. Extension of MD for another five years is a positive as well. Maintain Buy with TP of Rs 19,215.

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Outclassing peers

For Q1CY20, the company posted domestic revenue growth of 10.7% y-o-y, which marks the tenth consecutive quarter of double-digit domestic revenue growth. It will most likely be the highest among consumer goods companies led by volume and mix. It surpassed Godrej Agrovet’s Creamline’s dairy revenue growth, which came in at 5% y-o-y in Q4FY20. Exports revenue grew 12.9% y-o-y as lower coffee exports to Turkey are now in the base.

Despite the disruption caused by COVID-19-related lockdown, MAGGI, KITKAT and Nestlé MUNCH delivered strong performances. Out-of-home consumption was negatively impacted by lockdown leading to a subdued performance whereas contribution from ecommerce benefiting from the lockdown went up significantly.

Higher raw material price led to fifth consecutive quarter of gross margin compression; we expect margin pressure to persist over ensuing quarters as well.

Outlook: Best quality

The focus on innovation, launches, market share and premiumisation is likely to boost volume-led growth. Besides, the company’s new strategy—top line and market share focus—is encouraging. The success of launches, entry in new segments, proactive management and further margin improvement led by premiumisation have led to the stock’s re-rating to a historically high PE. We retain BUY/SO with TP of Rs19,215 (65x one-year forward EPS). At CMP, the stock is trading at 65.8x CY21e EPS.

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