Nestle India Q2 Results Review - Sees Subdued Earnings In The Very Near-Term: Yes Securities

Yes Securities Report

Nestle India Ltd. continued to report weak set of numbers for the second consecutive quarter versus expectations. Domestic sales grew just 1.2% due to muted consumer demand. We believe underperformance in Maggi (ex-Masala-Ae-Magic), Milk and Milk Nutrition (ex-Milkmaid) and Munch, among the bigger portfolio, impacted domestic sales in Q2.

Going forward, while the sector is expected to gain from improving rural growth, Nestle with rural mix of 20-25% remains at the lower end among its peers. Hence, rural recovery led volume push will be lower for Nestle.

Gross margins remained under pressure with 100 bps QoQ contraction largely led by high commodity prices especially for coffee and cocoa. Higher other overheads (+210 bps YoY) driven by increase in advertising and marketing investments, meant that Ebitda margin was down 150 bps YoY (~160 bps below our estimate).

Key commodity inflation plus volatility will continue to put pressure on profitability in the near-term. Over next two-years, we are now building ~9% EPS CAGR (on a normalized FY24) led by ~8.7% revenue CAGR.

The stock currently trades at ~72 times /62 times/56 times FY25E/FY26E/FY27E EPS. We assign multiple of ~60 times and roll-forward to FY’27E EPS, arriving at a revised target price of Rs 2,550 (Rs 2,515 earlier). Maintain Neutral rating.

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