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“BUY” This Large Cap FMCG Stock With A Target Price of Rs. 22,395: Sharekhan

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Today, the Nifty managed to stay over 17,500, and shares of fast-moving consumer goods (FMCG) are in high demand. The Nifty FMCG index increased by 1.58% to 38,246.80. The Sensex and Nifty are both up 0.25 percent today, with FMCG stocks leading the way. The Sensex is up roughly 200 points hovering above 58,600, while the Nifty50 is trading over the 17500 level on Thursday. FMCG, energy, metal were mostly responsible for the market's rise, what experts believe. While Indian markets were tumultuous on Thursday, Sharekhan Ltd advocated buying Nestle India Limited shares. From the current market price of Rs. 19,260, the brokerage has set a target price of Rs. 22,395 for the stock.

 

Financial record of Nestle India Limited
 

Financial record of Nestle India Limited

According to Sharekhan Ltd "Nestle reported consistent revenue growth at 10.9%, 10.6%, and 7.2% in 2018, 2019, and 2020, respectively. Nestle's domestic volume was at 4,68,000 tonne in CY2020, up from 3,43,000 tonne in CY2016. The company registered revenue mix and volume-led CAGR of 9.3% over 2016-2020. Higher volumes led to sustained value growth with CAGR of domestic sales over 2016-2020 reported at 11%. Various cost-saving initiatives undertaken by the company coupled with operating efficiencies helped to improve operating profit margin (OPM) from 17.6% in CY2016 to 21.7% in CY2020. OPM registered CAGR of 16.6% over 2016-2020. During the same period, net profit reported CAGR of 29.9%, while ROIC reported CAGR of 39.2%."

The brokerage in its research report has said that "Nestle's annualised 20- year return between 2001-2021 is at 19.8%. The company reported strong YTD September 2021 growth across its domestic portfolio (90% from volume and mix) with milk and milk products (42.8% contribution to sales) growth at 1%, prepared dishes and cooking aids (32.1% contribution to sales) growth at 20.9%, confectionery (14.9% contribution to sales) growth at 22.3%, and powdered and liquid beverages (10.2% contribution to sales) growth at 15.7%. KitKat and Munch achieved higher growth in the confectionery portfolio."

Sharekhan has said in its research report that " Nestle's sales volume growth stood at 9.3% over CY2016-CY2020 with moderation of volume growth of 9.6% in CY2019 and 5.7% in CY2020 from ~11% over CY2016-CY2018. The pandemic affected the performance in CY2020, resulting in moderation in volume growth. However, with the decline in COVID-19 cases, good pace of vaccination, and improvement in footfalls, OOH categories will see a stark improvement in performance. Further, the company is banking growth levers such as 1) increased presence in rural markets, 2) increased new product contribution, and 3) accelerated footprints through new channels. We expect volume growth to improve to 11-12% in the medium term."

The brokerage’s take on Nestle India Ltd

The brokerage’s take on Nestle India Ltd

According to Sharekhan "Nestle India Limited (Nestle) has underperformed the broader indices in the past one year. Financial performance was affected by the supply-led disruption caused by the first wave of COVID-19, reduction in sales of out-of-home categories (OOH) due to lower mobility, and lower export sales. We believe COVID-19 led muted impact on the performance of OOH categories is fading out and expect a strong comeback with improved footfalls in the coming quarters. This would help the company to get back on the double-digit growth trajectory. Further, approval under the PLI scheme for processed fruits and vegetable category will act as an additional growth lever along with core innovation strategy, rural expansion, and becoming a formidable play on e-commerce to achieve double-digit earnings growth in the medium term."

In its research report, the brokerage has noted that "The company is focusing on lower wattage (production was down by 42% over CY2016-CY2020 resulting in saving of Rs. 50 crore), improving plant-level efficiency, procurement excellence, and reducing cost through Project Shark (Rs. 200 crore cost saving in CY2020) to mitigate the impact of raw-material inflation and drive sustainable margin expansion in the long run (OPM expanded by 217 bps over FY2018-FY2021). With margin expansion anticipated in the coming years, PAT is expected to post a CAGR of 19% over CY2020- CY2023. Return profile is expected to remain strong while we expect the company to maintain strong dividend pay-out in the coming years through healthy cash flows."

Buy Nestle India Ltd with a target price of Rs. 22,395

Buy Nestle India Ltd with a target price of Rs. 22,395

Sharekhan Ltd has claimed that "Nestle is the largest food company with a strong brand portfolio in the packaged food and beverages space, which will help it achieve good growth at a time when consumers are shifting to trusted brands and rural aspirations are improving, thereby boosting overall penetration. The stock has underperformed the broader indices and is currently trading at 65.8x and 53.9x its CY2022 and CY2023E EPS, respectively. With capacity expansion (commissioned 9th factory in Sanand, Gujarat) and focus on improving reach in key markets, the company is well poised to achieve double-digit earnings growth in the medium term. This along with a cheery dividend payout makes it a good pick from a long-term perspective. Thus, we maintain our Buy recommendation on the stock with an unchanged price target (PT) of Rs. 22,395."

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Sharekhan Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Story first published: Thursday, December 9, 2021, 15:54 [IST]
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