1:10 Stock Split, 1400% Dividends Soon: Nestle's Long-Term Growth Drivers Intact; Acculumate This FMCG Stock?

Buy on Dips: After hitting back-to-back new 52-week highs last week, the share price of FMCG giant Nestle India has witnessed profit-booking this week due to a bearish market tone and investors cashed in gains. With the downside in share price, there have now emerged accumulating opportunities in Nestle whose long-term prospects look quite promising.

After the analyst meeting, Prabhudas Lilladher recommended accumulating Nestle shares for a target price of Rs 25,471 apiece, which hints at over 8% potential upside from the current market price. While brokerages like Motilal Oswal and Antique Stock Broking have suggested a 'Neutral' and 'Hold' outlook on this FMCG stock with TP of Rs 23,900 and Rs 23,549 respectively.

On Thursday, Nestle's share price tumbled by Rs 680.50 or 2.81% on BSE to end at Rs 23,567.60 apiece. The company has a market cap of over Rs 2.27 lakh crore. Despite the latest hiccups in the stock, Nestle has outperformed benchmarks with a gain of nearly 21% year-to-date.

Nestle's growth outlook is robust, and its stock price is bound to be sub-divided becoming more affordable for investors. Apart from this, Nestle is also going to reward investors with a whopping 1400% second interim dividend for the current year.

Dividends:

Nestle, who is the maker of our favourite Maggi noodles, on October 19th declared a second interim dividend of Rs 140 per share having a face value of Rs 10 each for r the year 2023 on the entire issued, subscribed and paid-up share capital of the Company of 9,64,15,716 equity shares of the nominal value of Rs. 10 each.

The company's 2nd interim dividend for the year 2023 will be paid on and from 16th November 2023 to those members whose names appear in the Register of Members of the Company and as beneficial owners in the Depositories, as on the Record Date fixed for the purpose i.e., 1st November 2023.

Stock Split:

Nestle announced shares sub-division in the ratio of 1:10 -- which means --- existing 1 equity share having a face value of Rs 10 each will be sub-dividend into 10 equity shares having a face value of Re 1 each.

However, the Record Date for sub-division/ split of existing equity shares will be intimated in due course by the company.

Nestle Outlook Ahead:

Prabhudas Lilladher:

Nestle India gave 10 Mantras to sustain growth which include 1) huge scope to increase penetration across segments 2) distribution reach (reaches 2/3 of addressable households) 3) innovations (120 innovations in 7 years, 10 in pipeline with 6.1% of sales) and 4) RURBAN led growth (rising accessibility and affordability). NEST is building capabilities to sustain double digit growth by 1) significant capex program of Rs50bn 2) continued investment in distribution expansion and supply chain 3) new innovations and categories like Pet Care, Millets etc. NEST is targeting to gain from a shift in not only growth of F&B market but a 20x gap which exists between branded and overall food market.

Analysts here in their note said, "We believe input cost inflation remains a near term challenge given coffee, sugar and Milk inflation and global geopolitical uncertainty although it aims to reduce impact by efficient sourcing, supply chain, manufacturing and distribution efficiencies."

Long-term growth drivers remain intact, led by 1) sustained expansion in rural reach (~20-25% of sales) 2) capacity increase in Maggi & confectionary 3) huge scope of growth in segments like coffee, RTD, chocolates & Pet care and 4) channels of future like E-commerce (6.6% of revenues). We estimate a 12.2% PAT CAGR over CY23-25. Hence, they said, "We expect steady returns in the near term despite rich valuations of 63.1x Sept25 EPS. Maintain Accumulate with a DCF-based TP of Rs25,741 (unchanged)."

Motilal Oswal:

- There is no material change to our FY24* and FY25 EPS estimates.
- The long-term narratives for NEST's revenue and earnings growth are highly attractive. India's Packaged Foods segment offers strong growth opportunities.
- This is particularly true for NEST, which has a strong pedigree and distribution strength. The successful implementation of the company's volume-led growth strategy in recent years provides confidence in its execution as well.
- NEST's distribution expansion and its ability to sustain a high proportion of NPD sales are also encouraging.
- However, at 81.3x/65.9x FY24E/25E EPS, the stock's valuations are expensive. We value the stock at 65x FY25E EPS to arrive at a TP of INR23,900. We maintain our Neutral stance.

Antique Stock Broking:

Going ahead, Nestle will capitalize on the low penetration and per capita consumption of branded packaged food to drive sales growth. This, in our view, will be through a combination of a better supply chain network, better servicing of the existing rural distribution, and calibrated product innovations (health-based and tasty products). This time the management's presentation provided a higher thrust on Nestle's global R&D strength and its benefits across operations. We expect Nestle to outperform in consumer staples led by healthy volume growth in the coming years. In the short term, we believe Nestle India will be able to expand its gross margin over the last year, as most of the sharp inflation is in the base. We maintain our forecast and HOLD recommendation on the stock with a target price of Rs 23,549 due to rich valuations at PER of 60x 1HCY25E EPS.

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.