Nestle India Ltd Stock Research Report

Short-Term Turbulence Continues, Long-Term Outlook Remains Intact; Maintain BUY

Est. Vs. Actual for Q2FY25: Revenue – MISS; EBITDA – MISS; PAT – BEAT

Changes in Estimates post Q2FY25

FY26E/FY27E – Revenue: -4%/-4%; EBITDA -5%/-5%; PAT -5%/-6%

Recommendation Rationale

• Weak Performance: Nestle posted lackluster results for Q2FY25, with revenue growing by 1.3% YoY (compared to estimates of 6%), primarily due to subdued domestic demand, as volumes de-grew by 3% YoY. On a positive note, 5 out of 12 brands achieved double-digit growth, with the beverage portfolio showing strong high double-digit gains driven by increased penetration and premiumization.
• Margins pressure: The company continues to face significant cost challenges, with prices for coffee and cocoa remaining elevated, while cereals and grains experienced initial cost pressures. However, costs for milk and packaging have remained stable. The company’s gross margins stood at 56.4%, improving by 12 bps YoY, whereas EBITDA margins de-grew by 144 bps YoY to 23%, primarily due to higher ad spends.

Sector Outlook: Positive

Company Outlook: Positive. A key downside risk to our call is continued volatility in coffee and
cocoa prices.

Current Valuation: 66x Dec-26 EPS (Earlier: 70x Dec-26 EPS )

Current TP: Rs 2,640/share(Earlier TP: Rs 2,960/share)

Recommendation: We remain optimistic about the company’s long-term prospects. With an 11%
upside potential from the CMP, we maintain our BUY rating on the stock.

Nestle India Stock Research Report

Financial Performance

Nestle delivered a weak set of numbers, with domestic revenue growing by 1.2% YoY and export business increasing by 3% YoY. The company’s gross margins improved by only 12 bps YoY, reaching 56.4%, primarily offset by rising commodity prices (coffee and cocoa). EBITDA margins stood at 23%, down by 144 bps YoY due to higher ad spends. The company’s adjusted PAT grew by 9% YoY to Rs 986 Cr, driven by high exceptional income from the slump sale of its Nutraceutical business to Dr. Reddy’s and Nestle Health Science Ltd, along with the rejig of its pet care business.

Outlook

We remain positive on Nestle from a long-term perspective, as current challenges such as lower volume growth and volatility in raw material prices are expected to be short-term in nature. With the rural market anticipated to recover in the coming quarters, Nestle is well-positioned to benefit, given its substantial expansion in rural presence over the last three years, increasing its reach from 110k to 200k villages.
Additionally, its long-term initiatives include: 1) Efforts toward rural penetration and market share gains through the RURBAN strategy, 2) Constant focus on innovation (launching 125 products in the last seven years), thereby driving growth, 3) Driving premiumization in core categories (e.g., Maggi noodles range) and launching differentiated products, 4) Entering new categories of the future (e.g., Nespresso, Purina Pet Care, and Gerber’s for toddler nutrition), 5) Introducing a D2C platform to engage consumer attention, and 6) Renewed focus on its fast-growing nutraceutical portfolio. We believe Nestle has all the right levers for long-term growth.

Valuation & Recommendation

We expect Nestle’s Sales, EBITDA, and PAT to grow at 11%, 13%, and 13% CAGR over CY22-FY27E, respectively. We maintain our BUY stance with a TP of Rs 2,640/share, representing an 11% upside from the CMP.

Key Financials (Consolidated)