15% upside: Here's why analysts are bullish on this underperforming large-cap stock

Maggi noodles maker Nestle India may emerge as a safe bet despite the ongoing volatility in the domestic equity market. With a rise of 6.5 per cent, shares of the company have underperformed the benchmark equity index BSE Sensex (up 21 per cent) in the past one year.

The FMCG major on April 21 reported a 1.25 per cent fall in its net profit to Rs 594.71 crore for the first quarter ended March 2022, mainly due to rising input costsNestle India. Nestle India, which follows January-December financial year, had posted a profit of Rs 602.25 crore in the same period a year ago.

On the other hand, the company’s net sales grew 9.74 per cent to Rs 3,950.90 crore during the quarter against Rs 3,600.20 crore in the same quarter last year.

Analysts are bullish on Nestle India despite a fall in net profit. Phillip Capital said, “Nestle Q1 CY22 results were below our estimates owing to significant raw material pressure. However, the stock has significantly underperformed benchmark indices in recent times and we believe Nestle’s valuations have become more favourable on a risk-adjusted basis.”

The brokerage further added that Nestle India offers a safe harbour in this VUCA world with earnings resilience on a high share of essential products, aggression in the innovation of existing categories, new product development, and increasing its depth of distribution network, particularly in rural areas.

VUCA stands for volatility, uncertainty, complexity, and ambiguity.

Phillip Capital has set a price target of Rs 20,800, showing an upside of 15 per cent from the current market price.

Among the major takeaways from the Q1 results, management highlighted that the domestic consumer demand was broad-based with strong double-digit growth coming across most of the brands (Maggi noodles, KitKat and Munch, Nescafe coffee), with the only exception being milk-based products, where growth has been subdued due to increased competition.

Brokerage house Sharekhan is also positive on Nestle India with a price target of Rs 20,880. 

“Nestle’s Q1CY2022 performance was largely in-line with expectation. Domestic business registered resilient performance with key brands growing in double digits, e-Commerce revenues grew by 71 per cent (contributing 6.3 per cent of sales), while R-urban journey is progressing well with rural India also clocking double-digit growth,” Sharekhan said.

“On the flip side, high raw material costs will keep margins stressed in the near term. However, with strategies in place, the company is focusing on achieving consistent double-digit revenue growth in the medium term with steady sales volumes. The stock trades at 69.6 times and 57.5 times its CY2022 and CY2023 earnings. We maintain a Buy on Nestle,” the brokerage added.

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