EQUITIES

Nestle India rating: Recommend ‘neutral’ with target price of Rs 17,250

Nestle is launching innovative products at 3x the pace of 5 years ago.

We think Nestle India under Suresh Narayanan has best-in-class strategy, strong execution capabilities and an emphasis on quick, decisive action. We expect it to be a key beneficiary of: a rise in consumption of ready-to-cook (RTC) products in a post-Covid world; continued spree of new launches and entry into new sub-categories; focus on volume growth and increasing shift from the unorganised to the organised sector with enhanced distribution reach; adoption of a new regional cluster-based approach to enhance efficiency; the out-of-home consumption opportunity. We forecast volume-led earnings growth of 5/16/16% in CY20F/21F/22F. However, the current valuation leaves little room for error. We initiate at ‘neutral’ with a TP of Rs 17,250.

We expect consumption of RTC foods to increase in a post-Covid world. Nestle’s products in this category — Maggi Noodles, Pazzta, Upma, Poha —could see significant demand growth. Nestle is launching innovative products at 3x the pace of 5 years ago. With a success rate significantly higher than the industry, new launches have contributed up to 4% to revenue over the past 4 years. We expect new launches to continue apace, likely aided by additions from the parent’s global portfolio. We believe Nestle’s cluster-based approach is more consumer-centric and should help it identify new opportunities with better RoIs. Moreover, Nestle’s Maggi Hotspot kiosks have kick-started its out-of-home foray, and we expect consumers to adopt these in a big way.

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We initiate coverage of Nestle India with a ‘neutral’ rating and a TP of Rs 17,250. We value Nestle at a P/E of 65x on March’22F EPS, at a 20% premium to its past 3-year average multiple, as we expect robust long-term growth, high earnings visibility and strong pricing power. However, at 66xCY21F EPS, we think the valuation is factoring in these positives.

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