Accumulate Nestle India; target of Rs 23,585: Prabhudas Lilladher

Prabhudas Lilladher's research report on Nestle India

We cut our CY23/24 EPS estimates by 1.1%/1.5% following lower than expected margins, even as volume growth at 5% remains healthy in a scenario of Maggi LUP (low unit price pack) price increase and commodity inflation in milk. We believe incremental margin expansion will come at tepid pace given that prices of Milk (40% of RM basket), Coffee and recent floods have potential to increase food inflation in coming quarters. NEST continues to witness growth across product segments in Metros, T1-6 cities & rural markets with growth of all channels like MT, OOH and E-commerce. Long term growth drivers remain intact, led by 1) sustained expansion in rural reach (~ 20% of sales) 2) healthy innovation pipeline (Munch breakfast cereals, Resource Fiber choice and Everyday Zero launched in 2Q23), 3) huge scope of growth in segments like coffee, RTD & Chocolates and 4) higher growth in channels like E-Com and MT.

Outlook

Although we expect NEST to gain from lower costs of palm oil, but firm prices of milk, fuel and coffee will prevent any meaningful margin expansion. We factor in EBIDTA margin improvement of 80bps in CY23 and 120bps over CY22-24. We estimate 17.1% PAT CAGR over CY22-24. We expect moderate returns given rich valuations of 61.9x June24 EPS. Maintain ‘Accumulate’ rating with a DCF based TP of Rs23,585 (Rs22,600 earlier).