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Nestle India rating: Recommend ‘neutral’ with a target price of Rs 17,250

Suresh Narayanan led Nestle India is doing best in its class strategy, strong execution capabilities, and an emphasis on quick, decisive action. The company is getting benefits from a rise in consumption of ready-to-cook (RTC) products in a post-COVID world, several new launches and entry into new sub-categories, a shift from unorganized to the organized sector, enhanced distribution reach and so on. We forecast volume-led earnings growth of 5/16/16% in CY20F/21F/22F. However, the current valuation leaves little room for error. We initiate at ‘neutral’ with a TP of Rs 17,250.

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Several expectations are being made that the consumption of RTC foods will increase in a post-COVID world and Nestle India products will come handy. Nestle products under the RTC category — Maggi Noodles, Pazzta, Upma, Poha — could face a significant increase in demand.

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Nestle India

Moreover, the company is launching innovative products at 3x the pace of 5 years ago and these products are showing a positive success rate. New launches in several categories have contributed up to 4% to revenue over the past 4 years.

Meanwhile, Nestle India is adopting a new regional cluster-based approach to enhance efficiency. This approach is more consumer-centric and is helping the company to identify new opportunities with better RoIs.

We initiate coverage of Nestle India with a ‘neutral’ rating and a TP of Rs 17,250. We value Nestle at a P/E of 65x on March’22F EPS, at a 20% premium to its past 3-year average multiple. However, at 66xCY21F EPS, we expect the valuation is factoring in these positives.

 

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