Reduce Nestle India; target of Rs 14,103: HDFC Securities

HDFC Securities' research report on Nestle India

Nestle’s 2QCY20 was a tad soft as the company clocked 2% YoY revenue growth. Domestic business clocked a mere 2.6% YoY growth (expectation 5%), much lower than its 11-12% consistent show in the last 8 quarters. Supply chain impact was higher for Nestle as Britannia and Marico’s Saffola clocked a strong 26/16% YoY growth. Maggi, Nescafe and milk portfolio have done well at the end of the quarter. E-commerce channel was up 122% YoY (3.6% of domestic revenue) as MT continued to struggle during the quarter. OOH consumption experienced a sharp decline on account of lockdown and weak consumer sentiments. GM remained weak and contracted by 190bps YoY to 56%. Cost control initiatives expanded EBITDA margin by 130bps YoY to 25.2%. We expect supply chain related impact to normalize and pantry loading led bump up is now in the past. We maintain our EPS estimate for CY20/CY21/CY22.

Outlook

The stock is trading at 65x P/E on CY21 EPS and limits absolute upside in the medium term, making the risk-reward unattractive. We value Nestle at 50x P/E on Jun-22E EPS and derive a target price of Rs 14,103. Maintain REDUCE.

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