Nestle share price opens strong; CLSA, other brokerages have this to say
CLSA largely maintains operating expectations but cut EPS estimates 2-3% on lower treasury yield and increased depreciation.
CLSA says near term concerns are fading for Nestle; normalcy to aid profits. CLSA thinks urban markets are likely to help accelerate and support growth momentum. HSBC thinks Nestlé delivered impressive 10.2% domestic sales growth, ahead of consensus expectations. HSBC also expects Nestlé to benefit from higher demand for ready to cook food. Motilal Oswal says resumption of double-digit sales growth is encouraging.
CLSA believes Nestle has regained double digit growth momentum; upgrade to Outperform from sell rating, raised target to Rs 17650 from Rs 16100 (11% potential upside). Nestlé India has returned to double digit growth momentum after a return to normalcy in factory operations. CLSA expects about 7% YoY volume and mix growth in Q3 with accelerated in-home consumption tailwinds. This, along with near normalcy in urban markets, is likely to help accelerate and support growth momentum. Accessing demand trends, the company has embarked on a capacity expansion journey with a total capex of about Rs 26 bn during the next 3-4 years. CLSA largely maintains operating expectations but cut EPS estimates 2-3% on lower treasury yield and increased depreciation.
HSBC maintains Buy rating with target price of Rs 20000. HSBC says Double digit growth in Q3 beats expectations. Nestlé delivered impressive 10.2% domestic sales growth, ahead of consensus expectations. Nestlé’s health and nutrition focus and innovation led growth make it even better positioned for the post Covid-19 era. HSBC believes valuation still builds in reasonable growth expectations.
Key Highlights of the results:
1) Nestle’s domestic sales rose 10.2% YoY, led by both volume and mix. Export sales rebounded sharply, rising 9.4% YoY (vs 9% decline in previous quarter)
2) Brands with higher home consumption, such as Maggi and Nescafe, witnessed robust growth. Out of home channels improved in sequential terms but remained impacted.
3) Overall, net sales rose 10.2% YoY (consensus was expecting 5-7% growth), EBITDA rose by 17.6% YoY, aided by 50 bps gross margin expansion and lower overhead costs. Higher staff costs (up 14.8% YoY) were due to incentives offered in lieu of Covid-19. Pre-tax income was up 12.4% YoY.
4) The e-commerce channel sales rose 97% YoY and now contribute 4% of domestic sales.
5) Nestlé announced its capex plan of Rs 26 bn over the next three to four years to augment its manufacturing capacity.
6) The company announced an interim dividend of Rs 135/share.
Several levers to support growth:
1) Nestle’s return to double digits sales growth, after a quarter of disruption, is quite impressive and highlights the strength of its brand and operational efficiency. As the out of home channel further normalises, it would give further fillip to Nestlé’s growth in the coming quarters.
2) HSBC also expects Nestlé to benefit from higher demand for ready to cook food in a post Covid-19 era with elevated hygiene and safety concerns.
3) Nestlé’s capacity expansion plans, along with product launch momentum, paves the way for stronger medium term expectations
4) Overall, HSBC have pencilled in FY21 revenue growth of 8.7% and income growth of 9.5% YoY. We expect a full recovery in FY22 and model PAT growth at 25%.
Why investors should stay positive:
1) Structurally, HSBC views Nestlé as a proxy on growth in Indian consumption as per capita incomes increase.
2) Nestle’s volume and premiumisation led strategy is delivering results with leadership positions across various categories.
3) With a product portfolio and product strategy that focuses on nutrition, health and wellness, we think Nestlé is well positioned to sustain strong growth in the long term.
4) Nestle is also deepening its rural presence through LUPs (Low Unit Packs) and focussed innovation, which should also augment its growth trajectory.
5) Having underperformed in the risk on rally, Nestle looks well positioned with strong earnings growth momentum as the risk on stance of the market recedes.
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Motilal Oswal maintains neutral rating on Nestle, raised target to Rs 16440.
Key highlights from management commentary:
1) Nestle reported double digit growth in key brands such as Maggi noodles, Maggi sauces, KitKat, Nestlé Munch, Nescafé Classic, and Nescafé Sunrise, boosted by in-home consumption.
2) Factories have returned to their normal output.
3) The e-commerce channel grew by 97% in the quarter and now contributes 4% to domestic sales.
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