Nestle India gains 2%, nears 52-week high on strong Q3 revenue growth

Shares of Nestle India were up 2 per cent at Rs 20,130 on the BSE in Thursday’s intra-day trade in an otherwise subdued market after the FMCG major reported strong revenue growth of 18.2 per cent YoY to Rs 4,567 crore in July-September quarter (Q3CY22) led by Maggi noodles, Milkmaid & Nescafe classic.

The stock of packaged foods company quoted higher for the seventh straight trading day and has rallied 9 per cent during the period. The stock traded near its 52-week high of Rs 20,200, which it touched on November 20, 2021. In comparison, the S&P BSE Sensex was down 0.28 per cent at 58,940 at 10:33 AM.

The sales growth during the recently concluded quarter was highest in the past five years. Growth was contributed by a mix of price & volume growth. Domestic sales grew 18.3 per cent while exports were up 15.7 per cent driven by expansion in newer markets contributed by Maggi noodles and confectionary segment. The company’s net profit grew 8.3 per cent year-on-year at Rs 668 crore. Nestle India follows January-December as its financial year.

Earnings before interest depreciation and amortization (EBITDA) grew 6.8 per cent YoY at Rs 1,020 crore. EBITDA margin contracted 240bp YoY to 22.1 per cent, on account of higher commodity costs for key inputs. However, the management said it is witnessing early signs of stability in prices of a few commodities such as edible oils and packaging materials. However, fresh milk, fuels, grains and green coffee costs are expected to remain firm with continued increase in demand and volatility.

The board of directors of Nestle India declared second interim dividend for 2022 of Rs 120 per equity share amounting to Rs 1157.0 crore, which will be paid on and from 16 November 2022.

According to Motilal Oswal Financial Services, the long-term narratives for revenue and earnings growth are highly attractive. The Packaged Foods segment offers immense growth opportunities in India. This is particularly true for a company such as Nestle India, which has a strong pedigree and distribution strength. The successful implementation of its volume-led growth strategy in recent years provides confidence in execution as well.

Even as some major input prices have started to soften, Nestle India continues to face commodity cost headwinds. With four consecutive years of ad-spends to sales decline up to CY21 (to 5.5 per cent of domestic sales in CY21, the second lowest in the last seven years), the buffer to protect EBITDA margin erosion from gross margin pressures is limited, the brokerage firm said with ‘neutral’ rating on the stock.

The brokerage firm ICICI Securities believe higher volumes & margin expansion would boost earnings for the company. “We expect profit CAGR of 12.8 per cent in CY21-24. We also believe the company is increasing its addressable market by foraying in newer categories like breakfast cereals, pet foods & other newer categories. We remain positive on Nestlé from a longer term perspective,” the brokerage firm said in a note.