Analysts Remain Upbeat On Nestle India Despite Muted Q2 Results

Analysts remained bullish on Nestle India Ltd. despite the company missing estimates in the quarter ended June, a period marred by the pandemic. They expect the maker of Maggi noodles to benefit from market share gains and better growth prospects in the nation’s foods segment.

“The infant formula, dairy, and easy-to-cook portfolio will continue the growth momentum, despite the Covid-19 disruptions,” Jefferies said. A sharper recovery in economic activity and household incomes from calendar year 2021 should further the growth in the medium term, it said in a research report.

According to Motilal Oswal, while Nestle’s revenue during the quarter disappointed, weighed by ephemeral lockdown issues that impacted manufacturing, this would not pose much of a challenge going forward. The company, the brokerage said in a note, remains the best structural play in the Indian consumer space due to growth opportunities in the foods space and due to evident revival in top line and earnings momentum ahead of peers in recent years.

Revenue of Nestle India—that follows January-December fiscal—rose 1.7% year-on-year to Rs 3,050 crore in the April-June period, a period when the novel virus outbreak disrupted everything from production to supply of goods. Its net profit increased 11.2% over the year ago to Rs 487 crore, aided by lower taxes.

Nirmal Bang Institutional Equities hopes that the company would be able to sustain its healthy earnings growth, primarily driven by volumes and lower input prices compared to last year.

India’s consumer goods makers were battling the worst consumption slowdown in more than a decade even before the pandemic struck. The lockdown completely stalled businesses, barring essential services, in April and most of May before the government started easing restrictions.

Nestle India in its quarterly release said demand in all “out of home” consumption channels experienced a sharp decline due to the lockdown. But the company witnessed growth in “in-home-consumption”, which boosted sales of its Everyday Dairy Whitener, Nestlé a+ Milk, and other milk-based portfolio such as Nescafe Classic and Nescafe Sunrise. Sales of Maggi instant noodles also rose towards the end of the quarter after initial supply constraints.

The company, according to its statement in June, had launched a new range of Maggi noodles in Delhi-National Capital Region, Mumbai and Pune.

Edelweiss Securities, in its post-earnings report, said the consumer goods maker is focused on growth in various categories by stepping up launches, promotions and penetration. “To achieve double-digit growth (volume-led), the company is strengthening the positioning of existing brands and deepening penetration, and is in quest for innovation.”

The brokerage also expects margin pressure to subside as prices of milk and milk derivatives eased. It’s confident on Nestle India’s ability to hike prices whenever needed.

Still, there remain certain concerns.

According to Jefferies, higher share of discretionary and impulse products where the slowdown impact is more may weigh on Nestle India.

Emkay Global Financial Services said while Nestle India’s portfolio may benefit from the current consumption trend, it is already reflected in its forecast and upsides to growth momentum are not yet visible. The brokerage maintains a ‘sell’ rating on the company.

Of the 41 analysts tracking Nestle India, 14 have a ‘buy’ rating, 15 suggest a ‘hold’ and the rest recommends a ‘sell’. The average of Bloomberg consensus 12-month price targets implies an upside of 2%. The stock closed 2.49% down on Wednesday compared with a 0.86% drop in the benchmark Nifty 50 Index.