Nestlé’s current price builds in long-term earnings growth of c12.6%, which we see as undemanding given the size of the growth opportunity for its products.
Q3CY20 results beat expectations:
(i) Nestlé’s domestic sales rose 10.2% y-o-y, led by both volume and mix. Export sales rebounded sharply, rising 9.4% y-o-y (vs c9% decline in Q2); (ii) brands with higher in-home consumption, such as Maggi and Nescafe, witnessed robust growth. Out-of-home channels improved sequentially but remained impacted; (iii) overall, net sales rose 10.2% y-o-y (consensus expected 5-7% growth), Ebitda rose by 17.6% y-o-y, aided by c50bps gross margin expansion and lower overhead costs. Higher staff costs (up 14.8% y-o-y) were due to COVID-19 incentives. Pre-tax income was up 12.4% y-o-y; (iv) the e-commerce channel sales rose 97% y-o-y; (v) Nestlé announced its capex plan of Rs 26 bn over the next three to four years to augment capacity; and (vi) it announced an interim dividend of Rs 135/share.
Several levers to support growth:
(i) Nestlé’s return to double-digit sales growth, after a quarter of disruption, highlights the strength of its brand and operational efficiency. As the out-of-home channel further normalises, it would give further fillip to Nestlé’s growth; (ii) we also expect Nestlé to benefit from higher demand for ready-to-cook food in a post-COVID-19 era; (iii) Nestlé’s capacity expansion plans, along with product launch momentum, paves the way for stronger medium-term expectations; and (iv) overall, we have pencilled in CY20e revenue growth of c8.7% and income growth of 9.5% y-o-y. We expect a full recovery in CY21e and model PAT growth at c25%.
Why investors should stay positive: (i) Structurally, we view Nestlé as a proxy on growth in Indian consumption as per-capita incomes increase; (ii) Nestle’s volume and premiumisation-led strategy is delivering results; (iii) with a product portfolio and product strategy that focuses on nutrition, health and wellness, we think Nestlé is well positioned to sustain strong growth in the long term; (iv) it is also deepening its rural presence through Low Unit Packs and focussed innovation; and (v) having underperformed in the risk-on rally, Nestle looks well positioned with strong earnings momentum as the risk-on stance of the market recedes.
Retain Buy and TP of Rs 20,000: Nestlé’s current price builds in long-term earnings growth of c12.6%, which we see as undemanding given the size of the growth opportunity for its products.
Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.
Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.
