Neutral Nestlé India; target of Rs 17,500: Motilal Oswal

Motilal Oswal’s research report on Nestlé India

Milk & Nutrition and Chocolates & Confectionary continued their healthy growth momentum seen in recent years. Though the 11.4% growth in Prepared Dishes (Maggi) in CY20 was healthy, it was lower than our earlier estimate due to in-home consumption getting a boost during COVID. Performance was likely affected by a slower resumption in manufacturing as Nestlé does not outsource production. Beverage sales were flattish in CY20 due to significant out of home (OOH) component, which is only now normalizing. Contribution of newer products to sales remained healthy at 4.3% in CY20, which is creditable because the management’s focus was more on core products amid the pandemic. With 40-50 products under development, the launch pipeline is likely to be strong again going forward. The management underlined the increasing opportunity from rural India. From 7,000 villages in CY16, NEST is now present in 89,000 villages. The management is targeting 120,000 villages by CY24. At 25%, share of rural in Nestlé India’s sales is lower than peers. The management also provided additional details on the INR26b capex plan to be spread over 3-4 years. Capacity expansion in Maggi Noodles in Sanand will be part of the first phase in CY21, followed by Coffee in Nanjungud and Chocolate investment in Ponda and Tahliwal. Since the expansion will be in phases, it does not expect any significant impact of the capex on operating margin.

Outlook

We maintain our Neutral rating on the stock. While the structural investment case is strong, valuations at 55x CY22E EPS do not offer any material upside potential from a one-year perspective.