Nestle India top index loser after Q4 volumes decline: What should investors do with stock now?

Nestle India Q4: Revenue for operations for the December quarter has jumped 13.8 percent YoY to Rs 4,257 crore from Rs 3,739.3 crore a year-ago.

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Shares of Nestle India fell 4 percent in the early trade on February 17, a day after company announced its December quarter earnings.

On Thursday, the Maggi and Kitkat maker Nestle India reported a 62 percent year-on-year jump in its net profit at Rs 628 crore for the October-December 2022 quarter.

Net profit stood at Rs 386 crore in the same period last year, after an impact of Rs 236.5 crore exceptional loss.

At 09:20 hrs Nestle India was quoting at Rs 19,082.80, down Rs 537.90, or 2.74 percent on the BSE.

Also Read – Price hikes hit ‘chotu’ packs & demand in tier 2-6 towns, rural India resilient: Nestle

Meanwhile, revenue from operations for the December quarter has jumped 13.8 percent YoY to Rs 4,257 crore from Rs 3,739.3 crore a year-ago. On the operating front, EBITDA (earnings before interest, taxes, depreciation and amortization) came in at Rs 982 crore, higher by 15.4 percent.

Operating margins improved to 23 percent from 22.8 percent YoY.

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Here is what brokerages have to say about stock and the company post December quarter earnings:

Prabhudas Lilladher

Nestle remains positive on long-term growth opportunity with focus on innovations, rural and semi-urban areas (RURBAN) penetration, sharp initiative led efficiency and optimum use of emerging trade channels.

Prabhudas Lilladher believes Rs 50 billion capex over next three years is testimony to the growth potential, even though it expects Nestle to cut dividend payout to fund growth plans.

4QCY22 results were slightly ahead of estimates, led by better than expected margins, superior margin mix and strong growth across large metros & smaller towns and across channels particularly MT, out-of-home (OOH) & E-commerce.

Long term growth drivers remain intact, led by 1) sustained expansion in rural reach (~ 20 percent of sales) 2) capacity increase in Maggi and confectionary 3) huge scope of growth in segments like coffee, ready-to-drink (RTD) & Chocolates and 4) channels of future like E-commerce (6.5 percent of revenues).

Broking firm estimate 11.2 percent PAT CAGR over CY21-24 and expect moderate returns in near term given pending capex and rich valuations of 59x CY24 EPS.

It has maintained accumulate with  target price of Rs 21,021 (Rs 20,201 earlier).

Sharekhan

Broking house has retained buy on the stock with a revised price target of Rs 22,590

Nestle’s strong positioning in the domestic food market, innovative product portfolio, and improving out-of-home consumption with a thrust on improving penetration in rural markets will help it drive consistent double-digit earnings growth in the long run.

The company is supporting its consistent growth agenda by higher investments in capacity enhancement, strong brand support, and better R&D initiatives in the coming years.

Also Read – Royalty payment isn’t simply giving away money to parents: Nestle’s Suresh Narayanan

Goldman Sachs

Research firm Goldman Sachs has given a neutral rating to Nestle stock with a target price of Rs 19,900 per share.

According to the firm, the Q4CY22 results were in line with street expectations with volume growth sharply moderated due to large price hikes taken in low unit packs.

The gross margin pressure eased due to large price hikes & lower mix of low-unit price packs (LUPs).

Goldman Sachs has marginally lowered its CY23/24 earnings per share (EPS) estimates by 0.2 percent and 1.1 percent, respectively.

Morgan Stanley

Broerage house kept an underweight rating on the stock with a target price of Rs 15,315 per share.

The Q4 results of the company were below expectations on the top line, but they were ahead on margin.

The firm remained underweight on the stock due to margin pressure, likely mix deterioration, and relative valuation.

Jefferies

Jefferies has given Nestle a hold rating and set a target of Rs 18,100 per share. The report suggests that the Q4 saw a reversal of trends after several quarters of industry-leading growth. Additionally, the company has faced margin pressures for multiple quarters.

The report notes that while the margin climbed up smartly, volume growth decelerated to a multi-quarter low. The management has attributed part of the volume slowdown to the price hike in Maggi low-unit price packs (LUP). The price hike also resulted in a share loss as competition stuck to the existing price point.

The long-term outlook for the company appears to be upbeat as company intends to invest RS 5,000 crore on capex.

JPMorgan

Brokerage firm has kept overweight rating for Nestle India and set a target at Rs 21,200 per share. The report suggests that the company’s Q4 results were mixed, with LUPs weighing on volume growth. However, the margin beat was a positive surprise.

Furthermore, the report highlights a quarter-on-quarter expansion in gross margin with significant cost focus. The focus on costs is expected to support margins even as the cost of goods inflation remains partly firm. The short-term volume pressure is transient and that the company is well-placed to deliver consistent double-digit revenue growth and margin recovery.

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