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By HSBC Global Research
Nestlé’s Q1CY21 10.2% y-o-y India sales growth despite a strong base, with 17% EBITDA growth, indicates resilience. But Nestlé significantly underperformed last year, driven by past outperformance, valuation and the market’s risk-on context Structurally attractive Nestlé now offers defensiveness and strong earnings in a volatile year. Buy with TP of Rs 20,000.
Nestlé risk-reward appears quite favourable Nestlé stock has been flat in the past one year, making it the worst performer in the consumer staples peer group. This was despite the fact that operating performance for Nestlé has been fairly resilient during COVID-19 even with the disruption in out-of-home consumption categories. The main reason for Nestlé being held back was its valuation run-up, in our view, as it had been the best performer in the consumer group prior to the Covid-19 disruption (driven by its operating performance that stood out by a margin consistently), leading to expansion in multiples. As the market was in risk-on mode, Nestlé missed the market rally. Now, as the market becomes volatile again, we think Nestlé’s appeal as a strong defensive with a robust earnings outlook will improve, and we view the risk-reward as quite favourable.
Q1CY21 results were resilient and impressive despite high base, Nestlé’s domestic sales growth at 10.2% y-o-y was volume and mix-driven. Export sales, however, declined by 12.9% y-o-y on lower exports to affiliates. Products linked to in-home consumption continued to do well with double-digit growth. Out-of-home channels improved in sequential terms but remained impacted. Benign RM costs led to a 223bp gross margin expansion.
However, EBITDA margin expansion (of 190bp) was slightly lower due to higher advertising and sales promotion expenses. Overall, Q1CY21 net sales/EBITDA/PAT rose by 8.6%/17.2%/14.6% y-o-y.
Sales were in line with consensus, but EBITDA/PAT were 3%/4% ahead of consensus. Nestlé announced an interim dividend of INR25/sh.
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