Nestle India Q1 Review: Analysts Cut Target Price On Inflation Woes, Rich Valuation
Here’s what brokerages have to say about Nestle India’s Q1 CY22 results.
Analysts cut target prices for Nestle India Ltd. as sustained inflation pressures weigh on its margin and overshadow revenue growth, and on premium valuations.
The maker of Maggi instant noodles and KitKat chocolates—that follows calendar-year financial reporting—saw the steepest gross margin contraction in the last three quarters as input costs were at a 10-year high. It narrowed 313 basis points year-on-year to 55.4% in the three months ended March.
The company’s profit also fell 1.25% over the year earlier even as domestic sales grew 10.2%.
Nestle India expects cost pressures to stay in the near to medium term, indicating pressure on margin.
“Cost outlook for key commodities such as edible oils, coffee, wheat, and fuel remains firm to bullish, while costs of packaging materials continue to increase amid supply constraints, rising fuel and transportation costs,” Nestle India Chairman and Managing Director Suresh Narayanan said in a statement on Thursday. Cost of fresh milk is expected to remain firm, with a persistent rise in demand and increase in feed costs to farmers, he said.
Shares of the company fell as much as 2.11% but pared most of the losses to trade 0.7% lower around noon on Friday. The stock has fallen 8.04% so far in 2022 against a 0.69% gain in the Nifty FMCG index.
Of the 38 analysts tracking the stock, 17 recommend a ‘buy’, 14 suggest a ‘hold’ and seven have a ‘sell’ rating, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 4.6%.
Here’s what brokerages have to say about Nestle India’s Q1 CY22 results.
Prabhudas Lilladher:
Maintains ‘accumulate’, cuts target price to Rs 19,426 apiece from Rs 19,626 earlier.
It has cut CY22/23 EPS estimates by 2.1%/1.6% following gross margin slippage despite strong growth across key brands.
Expects back-ended returns given near-term margin pressure and rich valuations of 62.3x CY23 EPS. It factors in an Ebitda margin decline of 140 basis points in CY22 (40 bps over CY21-23) as scale efficiencies, mix and pricing actions won’t be able to neutralise 10-year high inflation.
Medium- to long-term growth drivers remain intact led by sustained expansion in rural reach (only 20% of sales), availability of capacity in Maggi, huge scope of growth in segments like coffee and chocolates and higher growth in e-commerce channels.
Edelweiss Securities
Maintains ‘buy’, cuts target price to Rs 21,430 from Rs 22,100.
The revised target prices follows the miss on margins and persistent inflation.
Although steep inflation poses a challenge, Nestle’s cost optimisation agenda, innovation and premiumisation are expected stand in good stead.
Continuing growth of e-commerce operations would also help the company overcome hindrances of the pandemic and augment its marketing efforts
Existing portfolio is cementing Nestle’s leadership—No. 1 in seven of the eight categories.
The stock is trading at 57.8x CY23E EPS.
Jefferies
Maintains ‘hold’, reduces target price to Rs 17,000 from Rs 17,200 earlier.
The brokerage has cut EPS forecasts marginally (1%).
At 72x CY23e EPS, Nestle remains the most expensive staples stock in our coverage.
Upside catalysts to the stock include strong economic recovery in CY22 aided by improving consumer sentiments and new launches from the parent’s stable.
Sustained raw material inflation and its adverse impact on demand is a key downside catalyst.
Elevated valuation multiples may result in significant underperformance if the sector sees a de-rating.
IDBI Capital
Maintains ‘hold’ with a target price of Rs 18,435 due to expensive valuation.
Maintains EPS estimates for CY22E and CY23E at Rs 27.41 crore and Rs 30.72 crore, respectively.
It values Nestle at 60x CY23E EPS.
Penetration driven growth from rural India is tracking well.
