Accumulate Nestle India; target of Rs 20,111: Prabhudas Lilladher

Prabhudas Lilladher's research report on Nestle India

We cut CY23/24 EPS estimates by 3.5%/2.7% following 118bps QoQ gross margin slippage in 3Q22 despite double digit topline growth and strong momentum across key brands. Growth momentum was intact across large metros & smaller towns and across channels particularly MT & OOH. Medium to long term growth drivers remain intact led by 1) sustained expansion in rural reach (~ 20% of sales) 2) availability of capacity in Maggi post expansion 3) huge scope of growth in segments like coffee, RTD & Chocolates and 4) channels of future like E-commerce as well as newly launched D2C website platform - mynestle.in (7.2% of revenues). Although we expect Nestle to gain from lower costs of Palm oil while firm prices of food grains, coffee and milk might prevent a sharp uptick in margins in near term. We factor in EBIDTA margin decline of 170bps in CY22 and a gradual recovery of 90bps over coming couple of years. We estimate 11.2% PAT CAGR over CY21-24.

Outlook

We expect slow returns given near term margin pressure and rich valuations of 66.1x CY23 EPS. Maintain Accumulate with a DCF based TP of Rs 20,111 (Rs20,178 earlier).

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Nestle India - 191022 - prabhu