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Nestle India Ltd (NS:): Nestle’s Q4CY21 revenue was in line, while EBITDA margin was better than expected. Domestic revenue growth was at 9% (+10% 2-year CAGR), with healthy volume and mix growth (+8% YoY). The company saw broad-based growth and traction was better in small towns and rural, contrary to its peers’ performances. Growth was led by deeper penetration (achieved 2/3rd of targeted villages). Exports were down by 7% YoY on lower coffee exports and changes in product mix. Gross margin was at 57% (-205bps/+132bps YoY/QoQ), slightly better than expected (HSIE 56%). The raw material inflation was partly offset by a better mix. EBITDA was up 13% YoY (+12% 2-year CAGR, HSIE 10%), led by the company’s cost-saving initiatives. We expect the healthy growth in in-home products to sustain and OOH to recover, but margin may be a cause for concern in the near term. We maintain our EPS estimates for CY22E/CY23E and value Nestle at 55x P/E on Dec-23E EPS to derive a TP of INR 17,991. With a rich valuation, the absolute upside is limited in the medium term, making the risk-reward unattractive. Maintain REDUCE.
PNC Infratech Ltd (NS:): PNC Infratech (PNC) reported a muted quarter (owing to delay in execution of Jal Jeevan Mission (JJM) projects) with revenue/EBITDA/APAT of INR 15.2/2/1.1bn missing our estimates by 8/10/20%. Whilst FYTD22 order inflow was tepid at INR 27bn, PNC maintained its INR 80bn order inflow target for FY22. The revenue growth target for FY22 was raised from 20% to ~22-24% and retained at 10-15% for FY23. Aligarh Ghaziabad asset proceeds are likely to flow in by the Q1FY23; they will be partly used for funding INR 7.2bn of balance equity requirement in 11 HAM assets. In the water segment (INR 41bn OB), PNC has INR 32bn OB under JJM (ex of INR 23.4bn of new JJM projects won Jan-22). We have cut our EPS estimate to factor in back-ended order wins. Given a strong OB and a comfortable balance sheet, we maintain BUY with reduced TP at INR 412 (15x Sep-23E, 1x P/BV for HAM equity investment).
Nestle India
Broadly in line; valuation still unattractive
Nestle’s Q4CY21 revenue was in line, while the EBITDA margin was better than expected. Domestic revenue growth was at 9% (+10% 2-year CAGR), with healthy volume and mix growth (+8% YoY). The company saw broad-based growth and traction was better in small towns and rural, contrary to its peers’ performances. Growth was led by deeper penetration (achieved 2/3rd of targeted villages). Exports were down by 7% YoY on lower coffee exports and changes in product mix. Gross margin was at 57% (-205bps/+132bps YoY/QoQ), slightly better than expected (HSIE 56%). The raw material inflation was partly offset by a better mix. EBITDA was up 13% YoY (+12% 2-year CAGR, HSIE 10%), led by the company’s cost-saving initiatives. We expect the healthy growth in in-home products to sustain and OOH to recover, but margin may be a cause for concern in the near term. We maintain our EPS estimates for CY22E/CY23E and value Nestle at 55x P/E on Dec-23E EPS to derive a TP of INR 17,991. With a rich valuation, the absolute upside is limited in the medium term, making the risk-reward unattractive. Maintain REDUCE.
▪ Revenue in line: Revenue grew by 8% YoY (+9% in Q4CY20 and +10% in Q3CY21). Domestic revenue grew by 9% YoY (+10% in Q4CY20 and +10% in Q3CY21, +9% HSIE) with 5% volume (tonnage) growth. Small towns and villages clocked 14% and 9% growth. Exports degrew 7% YoY (+18% HSIE). The company saw good traction in Maggi noodles, with an increase in availability. KitKat, Munch, and Nescafe Classic continued to deliver strong growth. We expect the momentum to sustain, led by deeper penetration and recovery in OOH products.
▪ Beat in the margin, cautious outlook: GM, impacted by rising raw material prices, contracted 205bps YoY (+231bps in Q4CY20 and -239bps in Q3CY21) vs. HSIE estimate of 308bps contraction. Employee/other expenses were up by -4/3% YoY. EBITDA margin expanded 80bps YoY to 23.4% (+29bps in Q4CY20 and -84bps in Q3CY21). EBITDA grew 13% YoY (HSIE 10% YoY). Adjusted PAT was up 21%, post adjusting for an exceptional item of INR 2.4bn. While Nestle has managed to improve its margin via cost savings and efficiencies, continued RM inflation poses a risk to it in the near term.
Analyst meet takeaways: (1) Nestle has been able to deliver steady topline growth in the past six years through a mix of volume (penetration-led) and mix growth. (2) The company has seen broad-based growth across all towns but growth has been skewed towards smaller towns and rural. (3) While the nutrition business is witnessing encouraging growth, milk continues to be impacted by the competition. (4) The company’s commodity cost index has been up in high single-digit in the last 6-9 months. (5) It has saved about 1- 1.5% of sales through its cost-saving initiatives since CY20.
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