Nestle India's investors may have to take a break on muted Q4 show

While valuations are rich, analysts have trimmed earnings estimates by 2-4% for CY20-CY23

Shares of Nestlé India declined by 5 per cent in intra-day trade on Wednesday after the coffee to ready-to-cook foods company’s operational performance in the December-ended quarter (Q4) missed street expectations. It recovered some of the losses and ended the trading session with a cut of 2.8 per cent, but analysts say the near-term outlook for the stock appears unexciting. Nestle India follows January to December accounting year.

The company’s revenues in the fourth quarter missed consensus estimates, mainly on account of slower than expected recovery in out-of-home consumption and lower export revenue besides, lower-than-expected profitability. 

It is key to note that demand for out-of-home consumption products saw a sequential improvement, but continued to remain below pre-Covid levels. Similarly, sales from exports dropped 8 per cent over the previous year due to lower coffee exports. 

Domestic revenue growth whilst steady at 10 per cent – led by 7 per cent volume growth – was lower on a sequential basis and also lagged most of its peers during the same period, said market experts. 

This, coupled with higher costs hurt the company’s operational performance. Employee expenses witnessed a sharp rise led by higher incentives in view of Covid, finalisation of long-term compensation arrangement for most factory employees, while other expenses were higher driven by increase in marketing spends. This restricted the earnings before interest, tax, depreciation and amortisation (EBITDA) growth to only 9 per cent while EBITDA margins remained flat, versus analyst estimates of 28 per cent EBITDA growth and 330 basis points margin expansion.

Overall, net sales was up 9 per cent YoY at Rs 3,433 crore versus analysts' expectations of Rs 3,510 crore, while net profit remained flat at Rs 469 crore against estimates of Rs 561 crore.

Yet, analysts continue to remain impressed by the company's full year performance. “Packaged food category continued to perform well, e-commerce continued its stellar growth (>100 per cent growth in CY20), contributing 4 per cent of domestic revenue. Maggi, KitKat and Nescafe (in-home consumption) posted double-digit growth during the year, capitalising on the reduced mobility among consumers,” said Varun Lohchab, research analyst at HDFC Securities.

Going forward, analysts believe Nestlé India is well positioned to deliver healthy volume-led growth aided by widening distribution reach, especially in rural markets, new product launches and capacity expansion plans.

Rural accounts for about 25 per cent of Nestlé’s total sales — one of the lowest among consumer companies in India. 

With rural growth outpacing urban by two times, headroom for the company to deepen penetration in the hinterland is significant, say Abneesh Roy, research analysts at Edelweiss. To this end, the company has doubled its reach from 45,000 to 90,000 villages in the past 18 months and has also tweaked its portfolio to stay relevant in those markets.

Nestlé is also investing heavily in capacity expansion and plans to augment its manufacturing capacities and set up a state-of-the-art green-field project in Sanand, Gujarat, for ready-to-cook foods, coffee, confectionary and milk and nutrition categories. “This investment reflects high confidence in its ability to grow double digit compounding for several years, in our view,” added Roy.

Even as most analysts remain bullish over the long-term prospects of the company, they have revised their earnings per share (EPS) estimates lower by 2 to 4 per cent for CY21 – CY23 factoring in the miss in Q4 and higher overhead expenses. 

Moreover, as analysts at Motilal Oswal Securities say, valuations at 59 times CY23 estimated EPS appear to completely factor in upside from a one year perspective. In other words, while there is little room for error, the stock returns may also be muted in the near-term.

Experts thus believe that only patient investors should accumulate on dips.