1QCY18 Result Update Institutional Equities Nestle India 11 May 218 Reuters: NEST.BO; Bloomberg: NEST IN Resurgence Continues Nestle India (NEST) reported strong overall performance during 1QCY18 driven by volume led revenue growth and improved profitability on the back of favourable commodity prices and efficiency measures adopted by the management. Comparable revenue growth in domestic business was 13.4% led by volumes and operating profit grew by 34.7% YoY. Healthy top-line performance was largely in line with our expectations however NEST positively surprised us on profitability front. Volume led double digit revenue growth: Management has delivered on its promise and reported strong volume driven revenue growth of 1.6% YoY on reported basis wherein domestic sales grew by 13.4% on like to like basis (1.9% on reported basis). We believe that NEST s innovation and new launches across the categories has been the turning point. During the quarter, NEST continued to expand its chocolate and confectionary portfolio by launching KitKat Strawberry Duo and Munch Crunch- O-Nuts available at an attractive price points. Recently, NEST announced adding Nestle Breakfast cereals from Cereal Partners Worldwide (CPW) to its portfolio which is a welcome move wherein we believe that NEST is further strengthening its presence in the healthy and nutritious food segments which is a less penetrated however fast growing category in India. We believe that management s continued focus on innovation and new launches across the categories will lead to high single digit to low double digit underlying volume growth in the medium term. Improved profitability: Favourable commodity prices (especially milk and milk solids) and premiumisation across the categories have helped NEST to report 3bps gross margin expansion YoY during the quarter. We believe that moderate input costs will continue to benefit NEST in subsequent quarters as well. With higher scale and focus on cost efficiency, NEST will continue to enjoy benefits of operating leverage. During the quarter, EBITDA grew by 34.7% which was 13.3% higher than our expectations and EBITDA margin stood at 25.3% thereby showing strong 45bps margin expansion on YoY basis. Apart from operational measures, NEST managed to improve its other income on account of higher liquidation and yields during the quarter. However, effective tax rate for the quarter has increased due to end of the income tax holiday at Samalkha factory Unit 2. As a result, Net income of Rs.424mn grew by 38.2% which was 13% above our expectations. Outlook and Valuation: In our opinion, strong and relentless efforts by NEST to achieve high volume growth are credible. Also, its business excellence model emphasises a lot on reduced processes and efficiency which along with increased elbow room for pricing after GST rate cut and favourable commodity basket should be margin accretive. Therefore, we have revised our earnings estimates upwards. We have retained our Buy rating on NEST with a revised target price of Rs.1,7 (earlier Rs.9,4) after rolling forward our investment horizon to June 219, implying an upside of 19% from CMP based on an earnings multiple of 5x. BUY Sector: FMCG CMP: Rs8,981 Target Price: Rs1,7 Upside: 19% Vijay Chugh Research Analyst vijay.chugh@nirmalbang.com +91-22-6273 864 Abhishek Navalgund Research Associate abhishek.navalgund@nirmalbang.com +91-22-6273 813 Key Data Current Shares O/S (mn) 96.4 Mkt Cap (Rsbn/US$bn) 866/12.9 52 Wk H / L (Rs) 9,497/6,45 Daily Vol. (3M NSE Avg.) 81,437 Price Performance 1 M 6 M 1 Yr Nestle India 5.7 15.4 29.8 Nifty Index 3. 3.8 13.9 Source: Bloomberg Particulars (Rsmn) 1QCY17 4QCY17 1QCY18 YoY QoQ CY16 CY17 YoY Net Sales 24,919 26,15 27,572 1.6 6. 91,413 1,,96 9.5 COGS 1,939 1,693 11,277 3.1 5.5 38,828 43,269 11.4 % of sales 43.9 41.1 4.9 (3bps) (2bps) 42.5 43.2 8bps Gross margin % 56.1 58.9 59.1 3bps 2bps 57.5 56.8 8bps Employee costs 2,461 2,67 2,69 9.3 3.2 9,16 1,175 12.9 % of sales 9.9 1. 9.8 (1bps) (3bps) 9.9 1.2 3bps Other expenses 6,345 7,38 6,637 4.6 (1.1) 25,71 25,688 2.5 % of sales 25.5 28.4 24.1 (14bps) (43bps) 27.4 25.7 (18bps) EBITDA 5,174 5,335 6,969 34.7 3.6 18,498 2,965 13.3 EBITDA margin % 2.8 2.5 25.3 45bps 48bps 2.2 2.9 7bps Depreciation 867 838 825 (4.8) (1.5) 3,537 3,423 (3.2) EBIT 4,37 4,497 6,143 42.6 36.6 14,961 17,543 17.3 EBIT margin % 17.3 17.3 22.3 5bps 5bps 16.4 17.5 12bps Interest expense 228 234 311 36.5 32.8 99 919 1.1 Other income 416 511 564 35.8 1.5 1,59 1,769 17.2 Exceptional items - - - - - (18) - - PBT 4,495 4,774 6,397 42.3 34. 15,454 18,393 19. Tax 1,428 1,656 2,157 51. 3.2 5,44 6,141 12.9 Effective tax rate % 31.8 34.7 33.7 2bps (1bps) 35.2 33.4 (18bps) PAT 3,68 3,118 4,24 38.2 36. 1,14 12,252 22.4 PAT margin % 12.1 11.8 15.1 3bps 33bps 1.8 12. 13bps EPS 31.8 32.3 44. 38.3 36. 13.9 127.1 22.4
Exhibit 1: Financial summary Y/E December (Rsmn) CY17 CY17 CY18E CY19E CY2E Net revenues 91,413 1,,96 1,12,492 1,26,835 1,44,563 YoY growth 11.8 9.5 12.4 12.8 14. EBITDA 18,498 2,965 26,244 3,629 35,624 EBITDA margin 2.2 2.9 23.3 24.1 24.6 PAT 1,14 12,252 15,722 18,829 22,473 EPS (Rs) 13.9 127.1 163.1 195.3 233.1 YoY growth 77.8 22.4 28.3 19.8 19.4 RoCE 47. 51.8 62. 65.9 7.5 RoE 31.7 36.6 43.6 47.2 51.1 P/E (x) 58. 61.7 55.1 46. 38.5 P/BV (x) 17.7 22.1 22.9 2.6 18.8 EV/EBITDA (x) 3.3 34.7 31.7 26.8 22.8 Exhibit 2: Our estimates versus actual performance Y/E Dec. (Rsmn) 1QCY17 4QCY17 1QCY18 YoY QoQ NBIE estimate Variation Net sales 24,919 26,15 27,572 1.6 6. 27,99 (1.2) EBITDA 5,174 5,335 6,969 34.7 3.6 6,14 13.5 EBITDA margin 2.8 2.5 25.3 45bps 48bps 22. 33bps Net Income 3,68 3,118 4,24 38.2 36. 3,753 13. Exhibit 3: Change in our estimates Y/E December Old estimate New estimate Change (Rsmn) CY18E CY19E CY2E CY18E CY19E CY2E CY18E CY19E CY2E Net sales 1,12,828 1,27,212-1,12,492 1,26,835 1,44,563 (.3) (.3) N.A. EBITDA 24,625 28,551-26,244 3,629 35,624 6.6 7.3 N.A. EBITDA 21.8 22.4-23.3 24.1 24.6 15bps 17bps N.A. PAT 15,32 18,118-15,722 18,829 22,473 4.6 3.9 N.A. Exhibit 4: Category wise volume growth trend Segment volume growth CY13 CY14 CY15 CY16 CY17 CY18E CY19E CY2E Milk products and Nutrition (1) (2) (3) (2) 2 4 5 5 Prepared dishes and cooking aids 4 4 (59) 71 19 14 12 13 Beverages 9 (11) (1) 11 8 8 8 Chocolate and Confectionaries (2) (12) (19) 7 4 6 6 6 Overall Volume growth 2 (25) 35 11 1 9 1 Exhibit 5: Category wise revenue growth trend Segment revenue growth CY13 CY14 CY15 CY16 CY17 CY18E CY19E CY2E Milk products and Nutrition 5 12 2 1 2 8 8 8 Prepared dishes and cooking aids 11 1 (56) 75 18 18 19 21 Beverages 18 1 (3) 7 12 14 16 Chocolate and Confectionaries 1 (3) (11) 7 3 12 12 12 Overall Revenue growth* 9 8 (17) 13 11 13 13 14 *Comparable sales growth; 2 Nestle India
May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Institutional Equities Exhibit 6: Volume driven sales growth Exhibit 7: EBITDA growth coming back (Rsmn) 3, 25, 2, 15, 1, 5, 34.4 15.7 14.8 1.6 9.1 6.8 7.3 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 Net Sales Growth YoY % 4 35 3 25 2 15 1 5 (Rsmn) 8, 7, 6, 5, 4, 3, 2, 1, 8.7 37.2 34.7 2.8 1.2.9 -.7 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 EBITDA Growth YoY % 9 8 7 6 5 4 3 2 1 (1) Exhibit 8: Net income growth trend Exhibit 9: Margin trending upwards (Rsmn) 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 124.2 59.6 38.2 23.3 6.7 6.8 9.7 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 Net income Growth YoY % 14 12 1 8 6 4 2 26 25 24 23 22 21 2 19 18 17 15.1 13.4 25.3 12.1 23.2 11.7 11.8 1.8 2.6 2.8 2.5 8.5 19.2 3QCY16 4QCY16 17.2 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 EBITDA margin % Net profit margin % 16 15 14 13 12 11 1 9 8 Exhibit 1: One-year forward P/E (x) 12 1 8 6 4 2 Forward PE 5 yr Median SD +1 SD -1 3 Nestle India
Financials (Standalone) Exhibit 11: Income statement Y/E December (Rsmn) CY16 CY17 CY18E CY19E CY2E Net Sales 91,413 1,,96 1,12,492 1,26,835 1,44,563 % Growth 11.8 9.5 12.4 12.8 14. COGS 38,828 43,269 46,834 52,526 59,613 Staff costs 9,16 1,175 11,349 12,81 14,564 Other expenses 25,71 25,688 28,65 3,869 34,762 Total expenses 72,915 79,131 86,247 96,26 1,8,939 EBITDA 18,498 2,965 26,244 3,629 35,624 % growth 13.5 13.3 25.2 16.7 16.3 EBITDA margin 2.2 2.9 23.3 24.1 24.6 Other income 1,59 1,769 2,281 2,934 3,739 Interest costs 99 919 1,14 965 965 Depreciation 3,537 3,423 3,666 4,24 4,244 Profit before tax (before 15,562 18,393 23,845 28,574 34,153 exceptional items) Exceptional items (18) Tax 5,44 6,141 8,123 9,745 11,68 PAT 1,14 12,252 15,722 18,829 22,473 Adj PAT 1,122 12,252 15,722 18,829 22,473 Adj PAT margin 1.9 12. 13.7 14.5 15.2 % Growth 77.8 22.4 28.3 19.8 19.4 Exhibit 13: Balance sheet Y/E December (Rsmn) CY16 CY17 CY18E CY19E CY2E Share capital 964 964 964 964 964 Reserves 31,859 33,241 36,875 4,981 45,7 Net worth 32,823 34,26 37,839 41,945 46,34 Total debt 332 351 45 57 578 Deferred tax liability 1,553 1,22 1,687 1,93 2,168 Total liabilities 54,437 58,699 63,825 71,498 79,717 Gross block 3,951 33,584 35,584 37,584 39,584 Depreciation 3,532 7,51 1,717 14,741 18,985 Impairment 118 372 372 372 372 Net block 27,31 26,162 24,496 22,472 2,227 Capital work-in-progress 1,882 942 1,2 1,2 1, Investments 17,557 19,789 21,936 24,733 28,19 Inventories 9,41 9,25 9,965 11,98 12,263 Debtors 979 89 959 1,125 1,251 Cash 8,8 14,574 19,329 26,862 35,283 Loans & advances 81 752 797 897 1,21 Other current assets 669 661 675 634 723 Total current assets 32,828 39,374 46,35 57,915 69,334 Creditors 7,992 9,846 9,657 11,641 12,531 Other current liabilities & 5,138 4,26 5,625 6,342 7,228 provisions Total current liabilities 13,668 14,927 16,47 19,251 21,24 Net current assets 19,161 24,447 29,943 38,664 48,13 Total assets 54,437 58,699 63,825 71,498 79,717 Exhibit 12: Cash flow Y/E December (Rsmn) CY16 CY17 CY18E CY19E CY2E PAT 1,14 12,252 15,722 18,829 22,473 Depreciation 3,537 3,423 3,666 4,24 4,244 Other income (1,59) (1,769) (2,281) (2,934) (3,739) (Inc.)/dec. in working capital (177) 1,61 59 748 1,349 Cash flow from operations 11,864 15,516 17,617 2,668 24,327 Capital expenditure (-) (2,7) (2,5) (2,5) (2,5) (2,5) Net cash after capex 9,794 13,16 15,117 18,168 21,827 Dividends paid (-) (5,64) (8,292) (1,219) (12,239) (15,282) DDT paid (-) (1,148) (1,688) (2,75) (2,485) (3,12) Inc./(dec.) in investments (2,75) (463) 134 137 282 Cash from financial activities (3,71) (7,1) (1,81) (11,156) (14,253) Opening cash balance 4,996 8,8 14,574 19,329 26,862 Closing cash balance 8,8 14,574 19,329 26,862 35,283 Change in cash balance 3,85 5,774 4,755 7,533 8,421 Exhibit 14: Key ratios Y/E December (Rsmn) CY16 CY17 CY18E CY19E CY2E Per share (Rs) EPS 13.9 127.1 163.1 195.3 233.1 Book value 34.5 354.8 392.5 435.1 477.5 DPS 58.5 86. 16. 127. 158.5 Valuation (x) P/Sales 6.4 7.6 7.7 6.8 6. EV/sales 6.1 7.3 7.4 6.5 5.6 EV/EBITDA 3.3 34.7 31.7 26.8 22.8 P/E 58. 61.7 55.1 46. 38.5 P/BV 17.7 22.1 22.9 2.6 18.8 Return ratios RoCE 47. 51.8 62. 65.9 7.5 RoE 31.7 36.6 43.6 47.2 51.1 Profitability ratios Gross margin 57.5 56.8 58.4 58.6 58.8 EBITDA margin 2.2 2.9 23.3 24.1 24.6 EBIT margin 16.4 17.5 2.1 21. 21.7 PAT margin 1.8 12. 13.7 14.5 15.2 Liquidity ratios Current ratio 2.4 2.6 2.8 3. 3.3 Quick ratio 1.7 2. 2.2 2.4 2.7 Solvency ratio Debt to Equity ratio - - - - - Turnover ratios Total asset turnover ratio (x) 1.3 1.4 1.4 1.4 1.4 Fixed asset turnover ratio (x) 3.3 3.8 4.6 5.6 7.1 Inventory days 83 78 74 76 74 Debtors days 4 3 3 3 3 Creditor days 73 75 76 74 74 4 Nestle India
Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 13 March 218 Buy 7,619 9,4 11 May 218 Buy 8,981 1,7 Rating track graph 1, 9,5 9, 8,5 8, 7,5 7, 6,5 6, 5,5 5, Not Covered Covered 5 Nestle India
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