Nestle India stuns the Street but valuations may keep investors at bay

According to Nuvama Institutional Equities, Nestle India has marked a “fabulous start to the year”. Motilal Oswal Financial Services calls it a “big beat in a challenging environment”

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Nestle India surprised analysts with its first quarter results for CY2023 with its net profit at Rs 736 crore beating estimates of Rs 674 crore.

Revenue from operations jumped 21.3 percent on-year to Rs 4,830 crore in the March quarter. In fact, the revenue growth was highest in the last 10 years. The company follows a January to December financial year.

According to Nuvama Institutional Equities, Nestle India has marked a “fabulous start to the year”. Motilal Oswal Financial Services calls it a “big beat in a challenging environment”.

On the operating front, EBITDA (earnings before interest, taxes, depreciation and amortisation) came in at Rs 1,098 crore, up 18 percent. Volume growth for the company was 5 percent YoY, while the Street was expecting only 3 percent growth due to inflationary impact on demand of Maggi ‘Chotu’ packs.

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“Volume growth, excluding impact of Maggi small packs, stands at 11  percent YoY. Sales grew in double-digits across all products,” said Nuvama’s Abneesh Roy.

For analysts at Motilal Oswal Financial Services, Nestle India’s better mix, healthy volume and better pricing, along with rapid acceleration in the out-of-home (OOH) business, stands out.

“The long-term narrative for revenue and earnings growth is highly attractive. The packaged foods segment offers immense growth opportunities in India, particularly for Nestle, which has a strong pedigree and distribution strength,” they said in a report.

Also Read: Nestle India beats projections, takes net profit up 25% to Rs 736 crore in Q1

What Street does not like

When Nestle announced its numbers during market hours on April 25, the stock took a sharp knock of 2 percent as it operating margins contracted.

Margins at 22.7 percent stand lower than 23.4 percent in the year-ago period. Estimates had pegged margin at 23 percent.

Management commentary from the company provides no relief here either. The company expects the cost of fresh milk, fuels, and green coffee to remain firm because of continued increase in demand and volatility.

Due to high inflation in dairy, Morgan Stanley believes growth was weakest in the Nestle India’s largest category – that’s milk and nutrition products. In CY22, the category contributed to 40 percent of the topline but grew only 9.5 percent.

Also Read: The myth around summer stocks

On the other hand, confectionary, prepared dishes and cooking aids as well as powdered and liquid beverages had witnessed double-digit growth in CY22.

The stock is trading at valuation at 57.6 times one-year forward earnings. “It is expensive and does not offer any significant upside from a one-year perspective. Thus, we reiterate our neutral rating on the stock with a target of Rs 20,500,” Motilal Oswal said.

Margin pressure and relative valuations are also keeping Morgan Stanley underweight on the stock. It has a target of Rs 15,315 on Nestle India.

On the other hand, Kotak Institutional Equities and Axis Securities have a more bullish target at Rs 22,250 and Rs 23,000, respectively.

“Constant focus on innovation by launching over 110 products in the last seven years, premiumising the Maggi noodles range and introduction of D2C platform to gauge consumer attention are the right levers for growth in the long run,” as per Axis Securities.

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