Maintain ‘buy’ on Nestle India with TP of Rs 21,110


nestleWe expect Nestlé’s EBITDA margins to bounce back on the back of the company’s strong pricing power and operating leverage.

Nestlé India (Nestlé) has been among the most consistent performers, clocking double-digit domestic sales growth in 12 of the past 13 quarters. In Q4CY20, its domestic sales (up 10.1% YoY) outgrew peer Britannia’s 6.1% YoY. Even so, the stock has corrected 14% from peak due to investors’ perception that the latest union budget would hit rural FMCG growth; a sequential dip in exports (~5% of revenue); a 150bps YoY spike in staff cost; and Marico’s entry in noodles. We do not view any of these as structural issues. On the contrary, we continue to expect Nestlé’s high innovation and ‘premiumisation’ agenda, and cluster-based distribution strategy to hold it in good stead. Maintain ‘BUY’ with a TP of Rs 21,110.

With urban revenue contribution of 75%, Nestlé is well placed to capture the likely urban recovery. Rural at ~25% of Nestlé’s sales is among the lowest. The company has doubled its reach from 45,000 villages to 90,000 over the past 18 months. We envisage Nestlé to benefit from rising sampling of its new RTC/RTE products (upma, poha, breakfast cereals) as well as its new spice mixes. Milkmaid, too, is seeing an uptick due to higher baking and cooking at home. In the past two years, the firm has launched 60 new products with a 70% success rate (innovating 3x its earlier rate). Nearly two-thirds of the firm’s key brands such as MAGGI Noodles, KITKAT and NESCAFÉ Classic posted YoY double-digit growth in CY20. E-commerce continues to grow (up 111% YoY); it now contributes 3.7% to domestic sales.

We expect Nestlé’s EBITDA margins to bounce back on the back of the company’s strong pricing power and operating leverage. Unlike many other consumer companies, Q4CY20 marked a second consecutive quarter of gross margin expansion (up 231bps YoY) for Nestlé. Indeed, Marico entered the noodles segment recently.

But, in our view, noodles is a tough category for new players considering Nestlé Maggi commands a dominant 60% market share and ITC is a strong number two.

We believe Nestlé’s focus on innovation, market share and premiumisation will boost its volume-led growth. The company is in a better position to fend off local competition as it has remapped India into 15 clusters, apart from decentralisation, which empowers factories and sales locations with lot of decision-making. Besides, with normalcy fast returning to modern trade (MT) and out-of-home (OOH) consumption, and the company’s widening rural reach, we believe Nestlé is by far the best placed foods company to play domestic consumption. Retain ‘BUY/SO’ with a TP of INR21,110. The stock is trading at ~53.6x CY22E EPS.


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