Nestle India's Target Price Raised As Q3 Profit Beat Estimates

Analysts raised the target price of Nestle India Ltd. after third-quarter profit and revenue beat estimates.

Here's what analysts said about Nestle India’s Q3 CY22 results:

ICICI Direct

• Maintains 'hold' rating on the stock with a target price of Rs 22,400 apiece (earlier Rs 21,600), implying a potential upside of 13%.

• Margins may improve above 24% in 2023 and 2024 reflecting the sharp dip in commodity inflation.

• Remains bullish on the company from a long-term perspective.

• Foray in newer categories, expansion of e-commerce channels and increasing manufacturing capacities is helping in increasing volumes.

• Higher volumes and margin expansion would boost earnings for the company. It expects profit CAGR of 12.8% in CY21-24.

• The company is undertaking a capex of Rs 2,600 crore in the next three to four years to expand the capacity of its existing products.

• Nestle is also increasing its addressable market by foraying in newer categories like breakfast cereals and pet foods, among others.

Nirmal Bang

• Maintains 'accumulate' rating with a revised upwards target price of Rs 21,160 per share (earlier Rs 21,045), implying a potential upside of 7.2%.

• Growth was broad-based and was aided by numbers of drivers — distribution expansion (especially through Project RURBAN we believe), robust out-of-home consumption, e-commerce growth acceleration, festive executions and media and promotion spends.

• The structural story for Nestle remains strong in the fast-growing packaged foods space in India.

• Nestle will continue to deliver strong growth going forward, with market share gains in its core categories, led by distribution expansion, further strengthening of its position in rural areas (it contributes 20-25% to domestic topline) and tier 2/3 cities and new product launches backed by R&D capabilities and faster growth in the premium portfolio, the brokerage said.

• These factors, along with market leadership in 85% of its categories give it enough pricing power to combat inflationary pressure and drive premiumization besides maintaining a decent volume growth.

• Addition of new categories (Pet Care and Toddler Nutrition segments) adds to the long-term growth and margin trajectory for the company.

• Distribution expansion especially through project ‘RURBAN’ among key drivers that led to improved overall growth.

Nuvama Institutional Equities

• Maintains 'buy' with a target price of Rs 23,425 per share (earlier Rs 21,940), implying a potential upside of 18.5%.

• The increase in revenue ties up with our view that noodles and biscuits are seeing demand revival due to downtrading from street food.

• Higher revenue growth can also be attributed to quick commerce helping impulse segment, innovation and rural expansion.

• A price hike of 10% reflects strong pricing power in a quarter of hyperinflation.

• Margins possibly close to bottoming out. However, the company has launched premium variants in various categories such as chocolates, noodles, ketchup and dairy products, which could hit margins in case they don't click in the market.

• Raises EPS BY 3.8% each for CY23E and CY24E.

Dolat Capital

• Upgrades to 'buy' rating with a target price of Rs 23,286 apiece (earlier Rs 22,130, implying a potential upside of 20%.

• On a three-year CAGR basis, Nestle's revenues increased by 13%, indicating acceleration in overall growth.

• Though results were in line with estimates, the brokerage has downward revised its CY22E/CY23E EPS estimates by 4.1/2.2% at Rs 256/309, respectively, to factor in firm input prices of fresh milk, fuels, grains and green coffee as indicated by the management.

• Inflationary pressure would continue to hit profitability in the near term but consumer adaptability in the long run and cost stabilization would help improve margins in H1 CY23.

• The brokerage has upward revised its CY22/23E revenue estimates by 1.4% each, to factor in strong revenue performance during Q3.

Motilal Oswal

• Maintains 'neutral' rating on the stock with an unchanged target price of Rs 18,700 apiece, implying a potential downside of 5%.

• The company's valuation is expensive and does not offer any significant upside from a one-year perspective.

• The long-term narratives for revenue and earnings growth are highly attractive. The packaged Foods segment offers immense growth opportunities in India, and this is particularly true for a company like Nestle, 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% of domestic sales in CY21, the second lowest in the last seven years), the buffer to protect operating margin erosion from gross margin pressures is limited.

• Gross margin came in 170 basis points lower than our estimate. But it may have bottomed out in Q3 CY22 and a recovery led by lower input costs and better realizations is imminent in the coming quarters.

• While demand and sentiment remained strong in metros, it was robust across smaller towns and rural markets as well – an encouraging development.