Hold Nestlé India; target of Rs 18000: ICICI Direct

ICICI Direct's research report on Nestlé India

Nestlé India (NIL) reported strong revenue growth of 10.8% despite a challenging environment for supply chain & manufacturing. However, we believe 70% of NIL’s product portfolio (milk & related products and noodles) would have benefited from the lockdown. The restricted ‘out of home’ consumption has driven growth in the instant snack. Moreover, consumer preferences have shifted towards packaged foods for increased hygiene consciousness. It is important to note that a 220 bps contraction in gross margins (largely due to elevated milk prices) has not impacted operating margins (down 70 bps) to the same extent. The company was quick to cut the overhead spend. We believe media spend would have been withdrawn in the last eight to 10 days of March 2020. Net profit was up 13.4% due to a cut in corporate tax rate. Other income declined 41% given reduced liquid investment as the company paid a special dividend in August 2019.

Outlook

In the current unprecedented times where supply chain & manufacturing operations have been hit by lockdowns, NIL is less vulnerable given its presence in packaged foods. With ~80% of revenue contribution from urban India, the company is also least disrupted by liquidity problems of wholesalers. The stock is trading at premium valuation multiples. We maintain our target price of Rs 18000/share with a HOLD recommendation.