Nestlé: maintain ‘buy’ with target price of 20,000 rupees

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Q1CY21 results were resilient and impressive despite a strong base, Nestlé’s 10.2% year-on-year domestic sales growth was driven by volume and mix.

By HSBC Global Research

Nestlé’s Q1CY21 sales growth in India of 10.2% year-on-year despite a strong foundation, with EBITDA growth of 17%, indicates resilience. But Nestlé significantly underperformed last year, due to past outperformance, valuation and the risk environment in the market. Structurally attractive, Nestlé now offers a defensive stance and solid earnings in a volatile year. Buy with TP of Rs 20,000.

Nestlé risk-reward looks quite favorable. Nestlé stock has remained stable over the past year, making it the underperforming consumer staples peer group. And this despite the fact that Nestlé’s operational performance has been quite resilient during COVID-19, even with the disruption of out-of-home consumption categories. The main reason why Nestlé was chosen was its rise in valuation, in our opinion, as it had been the best performer of the consumer group before the disruption of Covid-19 (driven by its operational performance which stood out for ), leading to an expansion by multiples. With the market in risk mode, Nestlé missed the market rally. Now that the market is becoming volatile again, we believe that Nestlé’s attractiveness as a strong defensive end with a strong earnings outlook will improve, and we see risk / reward as quite favorable.

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Q1CY21 results were resilient and impressive despite a strong base, Nestlé’s 10.2% year-on-year domestic sales growth was driven by volume and mix. Export sales, however, fell 12.9% year-on-year due to lower exports to affiliates. Consumer-related products at home continue to do well with double-digit growth. Out-of-home channels improved sequentially but remained impacted. The benign RM costs led to an increase in gross margin of 223 bps.

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However, the expansion of the EBITDA margin (of 190 bps) was slightly lower due to higher advertising and sales promotion expenses. Overall Q1CY21 revenue / EBITDA / PAT increased 8.6% / 17.2% / 14.6% year-on-year.

Sales were in line with consensus, but EBITDA / PAT was 3% / 4% ahead of consensus. Nestlé announced an interim dividend of INR 25 / sh.

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