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  • Stock recommendation: Nestle India — Add — Target price Rs 11,000

    Publish date: August 7, 2018

    Results update: Strong momentum sustains

    Nestle India has ticked all the boxes in the quarter ending June 30: the food maker saw its net profit surge, operating margins expand and domestic sales grow.

    The company’s top management attributed the strong headline numbers to favorable cost of raw materials and cost efficiency programs.

    The other reason for strong numbers is last year’s low base due to the GST disruption. But despite last year’s low input cost, the company’s two-year CAGR growth still seemed healthy.

    Key Highlights

    • Net profit grew by 50% (YoY). The profit after tax (PAT) figures stood at Rs 395.03 crore as against Rs 263.43 crore in last year’s corresponding quarter. The final figure was 5% ahead of our estimate.
    • The operating margin grew by 551 bps to stand at a healthy 24.1%. The low cost of commodities was a major reason for the company’s margins to improve. Although the company doesn’t disclose its ad spends in its quarterly reports, we believe that the Swiss-packaged food maker has reinvested the margins money for its promotional spending.
    • Revenues grew by 12% (YoY) due to volume growth across segments. While domestic sales grew by 12%, export revenues were at a high of 16% (YoY).
    • The company’s overall numbers have been high due to last year’s GST. But even two-year comparisons suggest that revenue, operating margin and net profit grew by 10%, 17% and 21% respectively.

    Valuation & outlook

    The company’s peers have reported better quarterly numbers but we like the shape the company is in at the moment. Although the strong performance in the last 12 months may have little upsides, we believe the company is well-placed for future growth.

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