Hold Nestlé India; target of Rs 18000: ICICI Direct

ICICI Direct's research report on Nestlé India

Nestlé posted strong results with 10.2% domestic revenue growth led by robust demand for noodles category supported by continued trend of higher ‘at-home’ consumption. Export sales were also up 9.4%. Though our channel check suggested dismal growth numbers, especially in infant food category, we believe this was only Metro cities (Delhi, Mumbai and Bangalore) phenomenon. There was strong growth in tier 2, tier 3 cities. Further, e-commerce sales also increased 97% in Q3CY20. It is now contributing 4% to overall sales. Operating profit increased 17.6% to Rs 883.6 crore. Operating margins improved 158 bps to 24.9%. The expansion in margins was a result of 54 bps gross margins expansion & 175 bps saving in overhead spends (largely due to lower advertisement spends). Net profit was down 1.4% to Rs 587.1 crore mainly due to lower tax in the base quarter due to changes in the corporate tax rate last year.

Outlook

In CY20, the company announced a dividend of Rs 196 /share, which is ~88% dividend payout. We believe the strong revenue growth and margin expansion would continue, going forward, given the slew of new launches is increasing contribution to sales & benign commodity prices scenario is here to stay. The stock is trading at premium valuation multiples. We maintain our target price of Rs 18000/share with a HOLD rating.

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