Prabhudas Lilladher's research report on Marico
We are cutting CY20-23 EPS estimates of Nestle by 3.2% to 4.2% on disappointing performance in 2Q20. Although Nestle posted positive sales growth of 2.6% despite setback in vending business, constraints in production and distribution limited gains in a very strong quarter for food essentials. We were also surprised at GM pressure given benign prices of Milk, wheat and Palmoil. Nestle is currently witnessing strong demand for Everyday Dairy Whitener, Tetrapack Milk, Maggi Noodles, Ketchup and Coffee and Resource Immunity boosters which will enable it post double digit sales growth from 3Q onwards. we believe expanding margins from current levels looks difficult as cut in adspend has bottomed out and Input costs of SMP, Palmoil, Wheat and Sugar are steady. In addition, our structural concerns on low growth in Infant nutrition and Beverages (~36% of sales) still remain. Despite strong parentage, brands and market leadership in key categories, valuations at 60.7xSep22 makes us retain REDUCE rating (Target Rs14089@50xSep22 EPS, Rs14609@50xSep22 EPS earlier).
Outlook
Although our switch trade to BRIT has played out (23% outperformance since May12,20), we still prefer Britannia given strong tailwinds from growth and lower raw material prices and reasonable valuations (41.9xSep22 standalone and 40xConsol EPS with 16.9% PAT CAGR over FY20-23).
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