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Maggi-maker’s Q4 results are unexciting. Where is the stock headed: Rs 21K or 15K?

NEW DELHI: Nestle India’s December quarter results were steady but unexciting. A pressure on material cost is likely to impact 2022 margins, said analysts who are largely ‘neutral’ on the Maggi maker’s stock given rich valuations at about 58 times forward earnings. Analysts have price targets ranging Rs 15,000-20,000 per share, suggesting limited upside potential in the stock.

Among foreign brokerages, Credit Suisse has maintained a ‘neutral’ rating on the stock with a target price of Rs 20,000 while Morgan Stanley sees it at Rs 15,715. This brokerage has an ‘underweight’ rating on the stock. Jefferies has a ‘hold’ rating with a target of 18,600. Nomura says the stock is worth Rs 21,500. CLSA, meanwhile, has a sell rating on the stock with a target of Rs 17,370.

Nestle India, which follows the calendar as a financial year, reported a 19.99 per cent drop in net profit at Rs 386.66 crore for the December quarter compared with Rs 483.31 crore reported in the same quarter last year. Revenue from sale of products stood at Rs 3,706.20 crore, a growth of 8.44 per cent over Rs 3,417.52 crore in the year-ago quarter. Volume growth for the quarter came in at 8 per cent.

In its 2021 concall, the company said 20-25 per cent of its revenues came from rural India and that it is only targeting 120,000 villages with a population of more than 2,000. The company already reaches 75,000-80,000 of such villages.

For the year, milk products and nutrition contributed 42.4 per cent to its revenues. The segment growth was mere 2.6 per cent due to higher competitive intensity. Prepared dishes and cooking aids segment accounted for 31.8 per cent of total revenues and grew 16.7 per cent.

Confectionary, which contributed 14.8 per cent to sales, logged 20.4 per cent growth. Besides, powdered and liquid beverages had a revenue share of 11 per cent and grew 16.1 per cent.

Domestic brokerage Motilal Oswal said December quarter sales were in line with its estimates. Volume growth of 9.6 per cent in calendar 2021 was impressive but segmental performance was a mixed bag, with the largest segment – milk and nutrition (43 per cent of calendar ’21 sales) – growing at 2.6 per cent YoY compared with 16-20 per cent in the other three segments.

“Valuations at 58 times 2023 P/E are, however, expensive and do not offer any significant upside from a one-year perspective. We value the company at 60 times March 2024 EPS to arrive at our target of Rs 19,400,” Motilal said.

Gross margin contracted 226 basis points YoY to 56.6 per cent for the quarter but was up 114 bps sequentially. The management highlighted inflation concerns for most inputs such as wheat, coffee, edible oils, dairy prices as well as packaging materials. It is looking to drive cost control measures to partly offset inflationary impact.

“We note that Nestle had seen higher operating cost structures last year (including incentives to factory

workers) due to Covid-led disruption. We believe Nestle could also look to rationalise marketing expenses due to inflationary pressure,” ICICI Securities said while suggesting a target of Rs 20,000.

Kotak said Nestle is a play on the Indian packaged foods space with robust brand leadership driving healthy volume growth, pricing power and premiumisation lever and renewed vigor on rural distribution expansion. This brokerage, however, has cut 2022-2023 EPS estimates by 2 per cent each and has revised its target on the stock to Rs 19,250 from Rs20,000 earlier.

Emkay has retained sell rating with a target of Rs 15,000 from Rs 16,500 earlier.

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