Analyst Corner: Maintain ‘buy’ on Nestle India with TP of Rs 21,796

Nestle India (Nestle), under Suresh Narayanan’s (MD & CEO) leadership, has been one of the most consistent performers clocking double-digit domestic sales growth in 11 of the past 12 quarters. With normalcy fast returning in modern trade (MT) and out-of-home (OOH) consumption, along with consolidation in favour of more trusted brands within home consumption, we believe Nestle is by far the best placed foods company to play this trend. Nestle is one of the most aggressive consumer companies on the e-commerce platform. Moreover, Rs 26 billion capex guidance indicates parent’s confidence in the India growth story. Hence, we continue to maintain ‘buy’ with TP of Rs 21,796.

Strongly poised to tap rural opportunity; innovation pace continues. Rural accounts for ~25% of Nestle’s total sales — one of the lowest. With rural growth outpacing urban by 2x, headroom for the company to deepen penetration in the former is significant. To this end, the company has doubled its reach from 45,000 villages to 90,000 in the past 18 months. Moreover, of Nestle Global’s 35bn brands, only nine are present in India, implying potential for introduction of new brands and products. Nestle has also innovated to capture new opportunities due to the pandemic. In the past two years, the company has launched 60 new products with 70% success rate (innovating 3x versus earlier).
Aggressive focus on scaling the ready-to-eat/cook categories. As work from home will continue in a milder form, we envisage Nestle to benefit from rising sampling of its new RTC/RTE products (upma, poha, breakfast cereals) as well as its new spice mixes for rice.

Milkmaid too is seeing an uptick due to higher baking and cooking at home. With MT reviving quickly (DMart grew 9% YoY in Q3FY21), Nestle will benefit due to its more discretionary portfolio and higher activation/ sampling of new products.

It has invested significantly in analytics and has termed it as MIDAS (multi-disciplinary analytic system). It is also planning to avail the government’s production-linked incentive (PLI) scheme to boost exports.

Outlook and valuation: Best quality; maintain ‘BUY’. We believe focus on innovation, market share and premiumisation will boost volume-led growth. Nestle is in a better position to fend off local competition as it has remapped India into 15 clusters, apart from decentralisation by moving a lot of decision-making to factories and sales locations. We retain ‘BUY/SO’ with TP of INR21,796. At CMP, the stock is trading at ~66x CY21E EPS.