This Large Cap FMCG Stock Reported 7% Volumes In Inflationary Environment, Brokerage Upgraded Target Price

The brokerage firm Prabhudas Lilladher retains accumulate rating to Nestle India Limited with an upgraded target price of Rs 19,721 apiece. Considering the estimated target price by the brokerage and the Current Market Price of the stock, stocks of the company see minor gains in the share price. Nestle India Limited has reported 7% volume & 9% pricing/mix growth during 2Q22. Announced entry into Rs40bn pet food category under PURINA brand by the acquisition of 100% subsidiary of the parent company for Rs 1.23bn. Launched GERBER brand in premium toddler food range in India.

Stock Outlook & Performance

The stock of Nestle India closed today at Rs 19,359.10 apiece, today it opened at Rs 19,112.40 apiece. Today it gained 1.29% from its previous close. It hit the 52-week low in May 2022, currently trading Rs 3,359.10 above the 52-week low.

The stock's 52 week low is Rs 16000 apiece and its 52-week high is 20,609.15 apiece, respectively. The ROE is 102.89%, the TTM PE ratio is 87.33, and the PB ratio is 89.55. TTM EPS is Rs 221.68. Its dividend yield is 1.03% and its face value is Rs 10. It is a large cap FMCG stock with a market capitalization of Rs 186,652 crore.

The stocks of the company have continuously given positive returns over the last 5 years. In the past 1 week has gained nearly 1.95% and 10.63% in the past 1 month, respectively. In the past 3 months and 1 year, it has gained 5.61% and 8.06%, respectively. In the past 3 and 5 years

Strong volumes in an Inflationary environment

Nestle India continues to show double-digit growth across key segments primarily led by mid to high single-digit volume growth, pricing & mix improvement. Nestle India's continued focus on Rurban strategy resulting in double-digit growth in small towns & villages while T1/2 cities sustained momentum. GM softened by 100bps QoQ due to high input costs and we expect it to bottom out with softening up of edible oil price & packing materials whereas prices of milk, grain & coffee remains an overhang in near term.

Management highlighted its growth strategy

1) Innovations being part of Nestlé's DNA (contribution up from 1.5% to 5.6% in 5 years)

2) Expanding reach with increased focus on Rural through creation of Rural distribution centers and wholesale hubs led to 2x growth in villages.

3) unleash the potential of evolving categories.

4) Increased focus on creating more SKUs across different brands.

Acquisition of Pet food business

Nestle India announced acquisition of pet food business from PURINA Pet care India for Rs 1.23 bn valuing at 3.4x of FY22 sales. Pet Food Business as a category stand at Rs 40 bn with 25% sales CAGR while PURINA's revenue has been estimated to grow by 50% with FY22-26 CAGR. PURINA's business is driven by specialist channel distribution network across 46 towns with 50 CDs & 185 suppliers. The acquisition marks change in the strategy of the company over the past 4 years as the category emerged from being an evolving segment to one with exciting future.

Launch of toddler food brand GERBER in India

Nestle is entering the toddler food segment with launch of its global brand GERBER in India. The emerging toddler segment as a category stands at ~ Rs 35 bn. GERBER will be a made in India product designed for Indian toddlers combining the benefits of four diverse groups: Cereal, Legumes, Milk and Fruits/Vegetables. The launch will able Nestle fill in product gap at the premium end, although we expect slow scalability given premium pricing and niche segment.

Gross margins contracted by 304 bps: Revenues grew by 16.1% YoY (3 year CAGR of 10.4%) to Rs40.4bn (PLe: Rs 38.9bn) with domestic/ export sales up by 16.4%/ 0.7%. Gross margins contracted by 304bps YoY to 54% impacted due to higher RM cost particularly in milk, fuel, grain & green coffee and costs are expected to remain firm in the near term. EBITDA grew by 1.8% YoY to Rs8.5bn, Margins contracted by 295bps YoY to 21%. Lower employee cost (80bps) as a % of sales helped to partially offset the raw material pressure. Adjusted PAT grew by 3.9% YoY to Rs5.5bn.

Key Takeaways

1) Demand trends accelerated in mega cities while RURBAN strategy helps in improving demand in rural villages.

2) 14.3% (2Q/1Q: 6.3%/8.5%) realization growth witnessed in 1HCY22.

3) Ecommerce business contribution to sales reached to 6.4%.

4) Nestlé focuses on innovation led growth, 100 products launched in past 5 years with contribution up from 1.5% to 5.6% till Jun'22.

5) Edible oil & packing materials is softening up whereas volatility will remain in prices of milk, grain & coffee in near term.

6) Calibrated price hikes balanced with cost efficiencies helped to partially offset inflation.

7) MILKMAID posted strong double digit growth which has led to 7.2% growth for 1HCY22 in milk products.

8) Pricing index for GERBER products will be 7x as that of MAGGI.

 

Brokerage retain Accumulate rating with upgraded target price

The brokerage said, "We believe PURINA acquisition provides entry into a high growth segment, however, given small size, it will not move the needle in the medium term. Launch of GERBER marks entry in premium toddler food products, however expect slow scalability given super premium pricing. We estimate 12.4% PAT CAGR over CY21-24 and assign DCF based target price of Rs19721 (Rs19426 earlier). Retain Accumulate."

Disclaimer

The stock has been picked from the brokerage report of Prabhudas Lilladher. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.