Why are analysts not too happy with Nestle India?

Nestle India has increased its rural reach with the help of distribution and marketing exercises, at a time when rural recovery remains weak for several other FMCG companies

Nestle India is the only FMCG stock in Moneycontrol's Maximum Pessimism list in December 2023 as analysts believe valuations are expensive and there is limited upside from its current levels.

At the current price of Rs 26,620, the stock is trading at a forward PE of 80x for FY24, having gained close to 20 percent in the past three months. The valuation is much higher as compared to other FMCG companies such as Hindustan Unilever, which has a forward PE of 55x and Britannia Industries, which is 58x as per Nuvama Institutional Research. Dabur India and Godrej Consumer Products have a forward PE of 48x and 53x for FY24, respectively.

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“The stock price continues to trade at premium valuation of 77x and 67x its CY2023E and CY2024E earnings, respectively. In view of the limited upside from current levels, we maintain our Hold recommendation on the stock with a revised target price of Rs 26,805,” said Sharekhan in its latest Nestle report.

Incread Research believes that the strong earnings momentum is already priced in the stock and stretched valuations for Nestle India limits any further upside.

The stock has 19 buy calls and 12 hold calls and 6 sell calls as of December 31.

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The Nescafe maker is focusing on a volume-led growth through improving penetration and increasing traction for new product launches. The company has launched 125 new products in the last seven years and is planning to launch 10 more products in the coming years, it said in its conference call.

Nestle India’s management feels that there will never be a consumption problem in India, but the challenge will be on driving it. The management stated that Nestle’s total addressable market for Gen-Z in India was at 470 million and is expected to go above 700 million over the next few years.

Rural play

Nestle India has increased its rural reach with the help of distribution and marketing exercises, at a time when rural recovery remains weak for several other FMCG companies.

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The company has a presence in nearly 108,000 villages, growing from about 41,000 villages in 2020. It has increased the number of wholesale hubs in rural areas to 8,013 units in 2023, from 3,301 units in 2020. The number of rural re-distributors has increased to 8,218 from 6,901 in 2020.

Q2 Earnings
Nestle India reported a 36 percent year-on-year growth in net profit at Rs 698.3 crore in the July-to-September quarter. Sales increased 9.5 percent YoY to Rs 5,037 crore in the same period. Volumes for the company grew in low single digits. Nestle India’s gross margins improved 380 basis points due to better product mix and relatively stable raw material prices.

What's next quarter?

Nestle is expected to deliver a 9.7 percent YoY revenue growth in the October-to-December quarter, better than other FMCG companies said Kotak Institutional Equities. While net profit is expected to grow 14.5 percent YoY said the brokerage firm. However, gross margins are expected to be flat due to deflation in commodities like wheat, edible oils, packaging, and dairy.

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