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Focus on volume led growth amidst tepid Urban demand

Quick Pointers:

? NEST plans to focus on volume led growth, current margins are at optimal level post 600bps expansion over the past 8 years

? Urban demand trends are tepid, and recovery is likely to be gradual aided by peaked out inflation and expected benefits of cut in Income tax rates.

We attended the Nestle India analyst meet where the company has given cautiously optimistic outlook on growth, notwithstanding near-term demand pressures led by high inflation and urban distress. NEST will focus on volume led growth with range margin margins as current levels seem optimal post 600bps expansion since 2016. NEST continues to innovate with rising share of NPD (6-6.5% of sales) and is looking at major gains in Maggi, Chocolates, Beverages and OOH consumption. We expect growth rates to accelerate given capacity expansion (Rs55bn in four years) and benefit from JV with Dr Reddy’s in the medical nutrition business.

We cut our FY25/FY26/FY27 estimates by 2.8%/1.9%/2% given 1) tepid demand in urban India (75%+ of sales) 2) margin headwinds given steep inflation in input costs of cereals, coffee & cocoa and 2) low growth potential in Infant nutrition (~30% of sales). We cut our DCF based target price to Rs. 2606 (Rs.2689 earlier) valuing it at 68x Mar’27 EPS. We would keenly watch out for the NEST’s strategy under the new management in coming few quarters. Retain Accumulate.

Analyst Meet Takeaways: 1) Nestle has done a capex of Rs.55bn between 2020 to CY2024 increasing capacity of Maggi, Coffee and Chocolate by 35% each. 2) Nestle currently has retail distribution reach of 5.2 million outlets (4mn in 2016 and 4.7mn in 2020) and would be looking at expanding the same to 6mn in coming few years 3) NEST will follow a volume driven strategy to push for growth 4) NEST’s product basket offers Premiumization opportunity of Rs75bn across portfolio, premium products have grown at 16% CAGR since 2015 5) 4) NEST’s JV with Dr Reddy’s will cater to Rs240bn medical nutrition market by leveraging on its R&D and distribution prowess of partner with many new launches on the anvil 6) The OOH market is expected to double by 2030 with a potential size of USD25-30bn, Nestlé is poised to seize the opportunity through innovations in coffee and tea machines, KitKat break zone and tie ups with Social, MOD, 7-Eleven and Chain Point etc. 7) NEST has stepped up innovations with 150 new launches in last five years, the share of new launches has increased from 1.5% of sales to 6-6.5% since 2016 8) Demand growth is slow in urban areas due to higher unemployment and slow real wage growth, while rural India has bounced back post Govt interventions and normal monsoons last year. 8) E-commerce contribution has surged to 8.5% in 2024, up from just 1% in 2016, showing a 32.6% YoY growth in 9MFY24.9) Pet care remains a small but high-potential business in India, as the country ranks 5th globally in pet population. 10) Nutrition business will have not more than 2-3% volume CAGR due to its limited usage in the lifespan of an individual 11) Digital media spending is expected to rise further in the medium to long term, enhancing consumer engagement, supporting new launches, and fostering innovation.

Sales up by 3.9%, Margins decline due to RM Inflation: Revenues grew 3.9% YoY to Rs47.8bn with domestic/ export sales up 3.3%/ 21.2%. Gross margins contracted 221bps YoY to 56.4%. EBITDA declined 0.9% YoY to Rs11bn; Margins contracted by 112bps YoY to 23.1%. Adjusted PAT declined 8.6% YoY to Rs7.1bn, excluding impact of Rs1.06bn exceptional item in base quarter, PAT increased by 6%.

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