Accumulate Nestle India; target of Rs 22,600: Prabhudas Lilladher

Prabhudas Lilladher recommended accumulate rating on Nestle India with a target price of Rs 22,600 in its research report dated April 25, 2023.

Broker Research

April 26, 2023 / 11:26 IST

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Prabhudas Lilladher's research report on Nestle India

We increase CY23/24 EPS estimates by 1.6%/0.7% following strong revenue performance with 5% volume growth (ex LUP Maggi 11-12%). However, we trim our gross margin estimates by 50bps/20bps in CY23/24 as rising prices of milk (~40% of RM basket) might delay margin recovery. Growth momentum remains intact across large metros & rural markets with growth across all channels like MT, OOH and E-commerce. Medium to long term growth drivers remain intact, led by 1) sustained expansion in rural reach (~ 20% of sales) 2) availability of capacity in Maggi post expansion 3) huge scope of growth in segments like coffee, RTD & chocolates and 4) channels of future like E-Com as well as newly launched D2C website platform - mynestle.in. Nestle is expected to gain from lower costs of palm oil, but firm prices of milk, fuel and coffee will curtail gains. However as margins in 2Q22/3Q22 were lower by 130/260bps than 1Q22 levels, expect QoQ margin expansion in next 2 quarters. We factor in EBIDTA margin improvement of 100bps in CY23 and 150bps over CY22-24.

Outlook

We estimate 18.0% PAT CAGR over CY22-24. We expect moderate returns given rich valuations of 58.8x CY24 EPS. Maintain Accumulate with a DCF based TP of Rs 22,600 (Rs22,070 earlier).

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