Kotak Institutional Equities says Nestle ended CY2020 with 9.2% revenue growth in Q4 largely led by volume and mix. EBITDA margin (21.7%) missed estimates (expected 22.6%) despite the significant beat on gross margin. Covid-led lockdowns and confined living have triggered a rise in penetration and product trials and it can potentially drive higher consumption/adoption of packaged foods. Nestle’s strong brand equity and product portfolio positions it well to benefit from any tailwinds. Nestle, however, is fairly valued; Kotak Institutional Equities trim CY2021-22E EPS by 1-2% and revise FV to Rs 17150 (from Rs 17500). The current market price of Nestle India is Rs 16755 down Rs 470 or 2.7%.

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Nestle Marginal miss on topline; higher operating costs weighed on profits:

Nestle reported 9.2% yoy growth in revenue to Rs 34.2 bn, marginally below estimates. Domestic revenue grew 10.1% yoy (expected 11%). Domestic sales growth was largely volume and mix driven. Out of home channel saw progressive improvement during the quarter, but continues to trend below pre-Covid level. Exports declined 7.7% yoy due to lower coffee exports. GM stood at 58.9% (expected 57%) expanding 240/100 bps yoy/qoq on the back of benign input costs (milk and derivatives).

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Nestle’s Gross profit grew 14% yoy to Rs 20.1 bn. EBITDA grew 11% yoy to Rs7.4 bn (5% below our estimates). EBITDA margin at 21.7% (estimate of 22.6%) declined 330 bps qoq (up 30 bps yoy). Higher-than-expected employee costs (+25% yoy) and other expenses (+12% yoy; A&P led) led to margin miss. Employee costs increased due to higher incentives (Covid-led) and finalization of long-term compensation arrangements for factory staff. PBT grew 7% yoy (KIE: 14%) to Rs 6.5 bn. Other income declined 32% yoy due to lower yields. Recurring PAT grew 2% yoy to Rs 4.8 bn (estimate of Rs 5.2 bn). PAT growth was dragged by higher ETR at 27.9%. Final dividend stood at Rs 65/share and total dividend for CY2020 stood at Rs 200/share.

Nestle is one of the best long-term plays in the rapidly growing India packaged foods industry. It offers a combination of:

(1) healthy volume + premiumization led top line growth
(2) potential margin expansion, especially if the company focuses aggressively on employee efficiency at 10.5% of sales

Nestle’s staff costs as % of sales are significantly ahead of companies like HUVR (4.5%), Colgate (7-7.5%), Britannia (3.5%), Dabur (9%) and Marico (5.5%), among others. Kotak Institutional Equities tweak estimates and trim EPS estimates by 1-2%. Maintain REDUCE and revise FV to Rs 17150 (from Rs 17500 earlier).