Nestle India Stock Research Report

Underwhelming. Reiterate neutral stance

Nestle’s Q2FY25 revenue growth was disappointing; it further de-accelerated to 1% YoY (vs 4% in Q1FY25) due to subdued consumer demand (urban has been witnessing decelerating demand trends over last few quarters). Gross margin was largely flat (despite significant inflation in key inputs) while EBITDA margin declined ~155bps YoY to 22.4% due to operating deleverage. Higher prices of key raw materials (cocoa, coffee etc.), margins are likely to remain under pressure. That said, Nestle appears to have a market share gain opportunity given the relative immunity from cocoa inflation as its key brands KitKat and Munch have lower cocoa content vs competition (~5% vs ~20% in Cadbury). Though we considered upgrading Nestle post stock underperformance of ~20% over last 12 months, we are unable to find any fundamental reasons, as of now. Maintain HOLD with revised TP of INR 2,350.

Revenue growth moderates

Nestle’s revenue grew 1% YoY (below estimates) in Q2FY25. Domestic revenue grew 1% YoY while exports grew by 3% YoY. It highlighted that (1) beverage business continues to outperform with strong double digit revenue growth led by premiumisation in coffee and backed by strong performance across NESCAFÉ CLASSIC, NESCAFÉ SUNRISE, and NESCAFÉ GOLD. (2) Prepared dishes and cooking aids also maintained growth momentum through portfolio premiumisation; Milkmaid, Masala-Ae-Magic and Toddler range delivered high double-digit growth while KITKAT grew in high singledigit, (3) Petcare witnessed high single-digit growth led by strong e-commerce. (4) E-commerce is growing in high double-digits (~38%) – contributed 8.3% to domestic sales (highest in last seven quarters) driven by Quick Commerce (QC) and support from other brands. The growth was driven by premiumisation, new user acquisition, festive participation and targeted digital communications. (5) OOH business grew in double-digit.

Nestle launches a new range of products in its CERELAC portfolio with variants of no refined sugar. The expanded range will consist of 21 variants of which 14 are to be with no refined sugar. Management plans to launch 7 of its 14 variants by November-24 and rest by following weeks.

Operating margin decline led by increase in brands investment

Gross margin was largely flattish YoY at 56.4% as elevated raw material inflation continues. Management highlighted: (1) Coffee and cocoa are facing unprecedented inflation; (2) cereals and edible oils are also starting to witness inflationary trends and (3) Milk prices and packaging material are relatively stable. EBITDA margin contracted by 155bps YoY to 22.4% due to higher investments behind the brands – increase in advertising and marketing investments for the quarter (other expenses were up by 211bps YoY, and 11% YoY on absolute basis). Nestle is likely to continue to invest gross margin benefits behind its brands. EBITDA and recurring PAT declined by 5% YoY and 13% YoY, respectively.

Valuation and risks

We cut our earnings estimates by 6% for FY25E-26E, modelling revenue / EBITDA / PAT CAGR of 7 / 7 / 7 (%) over FY24-26E. Maintain HOLD with a DCF-based revised target price of INR 2,350 (vs INR 2,500). Upside risk: Faster-than-anticipated recovery in demand environment. Downside risk: Higher-than expected inflation in key raw material prices.