Even after extending losses for 3 straight months since July, brokerage house Axis Securities has picked Nestle India as its top pick of the week. This is on the back of resilient performance amidst challenges, rural recovery and premiumisation.
The brokerage has a ‘buy’ recommendation on the stock with a target price of ₹24,100, indicating an upside of almost 11 percent from its current market price of ₹21,737.75, as of September 4.
Nestle India manufactures and markets a wide range of food and beverage products including milk and milk products, coffee, tea, noodles, chocolates, confectionery, and infant nutrition. Some of its popular brands in India include Maggi, Nescafe, KitKat, MilkyBar, and Nestle Everyday. Furthermore, it recently acquired Purina Petcare to enter into the pet care business and launched Gerber Cereals to drive the premiumisation agenda. The company operates a robust distribution network (5.1 Mn outlets) that covers both urban and rural areas of India.
Stock Price Trend
The stock has jumped around 11 percent in the last 1 year as well as in 2023 YTD, despite giving positive returns in just 3 of the 9 months so far in this current calendar year.
The stock rose the most in April 2023, surging 10.44 percent, and has shed the most in January, down 3 percent.
It is currently 7 percent away from its 52-week high of ₹23,390, hit on July 17, 2023. Meanwhile, it has advanced 21.5 percent from its 52-week low of ₹17,888, hit on March 15, 2023.
Earnings
Nestle India reported a 37 percent YoY jump in its net profit of ₹698.34 crore for the quarter ended on June 30, 2023, versus ₹510.24 crore in the same quarter a year ago. Meanwhile, its revenue from operations rose 17 percent YoY to ₹4,658.5 crore in the quarter under review as against ₹4,045.7 crore in the same quarter the previous year. The results were in line with the street's expectations.
"We have delivered a robust performance, with all product groups registering double-digit growth. This is the fifth quarter in a row of double-digit growth across all product groups. Domestic sales growth is broad-based and grew by 14.6 percent, on the back of prudent pricing and supported by mix and volume with targeted brand support. Key brands continued to perform well," said Suresh Narayanan, Chairman and Managing Director at Nestle India in a statement.
Investment Rationale
Resilient amidst weak macro environment: The brokerage noted that Nestle's Q2CY23 performance was robust, with domestic revenue growing by 14.6 percent YoY and exports surging by approximately 25 percent YoY, driven by continued expansion into new markets and channels. Furthermore, the management reiterated that its RURBAN strategy continues to drive overall rural growth, it added.
Rural on a recovery path: Axis also observed that FMCG companies have been grappling with a rural slowdown for several quarters, significantly affecting their overall volume growth. It anticipates that rural growth is poised for a rebound in the upcoming quarters due to increased spending in the lead-up to the general election, higher minimum support prices (MSP), an uptick in urban remittances, and a robust festive season, all of which are expected to bolster rural recovery. However, it's important to note that the potential impact of below-normal monsoons will be a critical factor to monitor in the coming months, it warned.
Betting on RURBAN strategy: According to the brokerage, with the rural segment constituting 20 percent of its sales, management has emphasised several initiatives. These include HAAT activations, enhancing shop visibility through RURBAN smart stores, and the implementation of Project Swabhimaan, designed to empower rural women much like HUL's Shakiamma's program. These initiatives have delivered the essential impetus needed to penetrate further into smaller towns and rural areas, yielding positive results for overall rural growth, it said. As of Dec’22, the company has established a presence in a total of 165,367 villages, with an addition of 55,000 villages in CY22, informed Axis.
New product development (NPD) and premiumisation growing strong: Nestle has introduced over 110 new products in the past seven years, with their contribution to revenue growing from 1.5 percent in CY16 to 5.4 percent in CY22, stated the brokerage. Furthermore, the company has 30 new projects in the pipeline, including its recent announcement of launching millet-based products. In a bid to promote premium offerings, Nestle acquired the PURINA Petcare business, which provides nutrition for pets, and globally launched the renowned GERBER cereals, catering to the nutritional needs of the toddler segment, it mentioned.
Outlook: The brokerage remains positive on Nestle as it consistently delivered resilient performance led by 1) Efforts towards rural penetration and market share gains through the RURBAN strategy, 2) Constant focus on innovation (launching 110+ products in the last seven years), 3) Premiumisation in the core categories, 4) Entry into new categories of the future (Purina Pet care and Gerber’s for toddlers), and 5) Introduction of D2C platform to gauge consumer attention.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
