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Improving margin outlook

Beverages and milk & nutrition drive growth in Q3

Nestle (NEST IN) Q4 revenue was up 8.3% YoY to INR 45.8bn, as domestic sales grew 8.9%, led by mid-single digit volume growth, with robust growth momentum in eCommerce (7% of sales) and out-of-home channels. Among segments, beverages and milk & nutrition posted robust double-digit growth in Q3. Strong demand for Nescafe Classic and Nescafe Sunrise propelled beverages growth, driven by big market share gains and increased household penetration. In the prepared dishes and cooking aids segment, growth momentum continues on the back of investments and innovations aimed at developing the market across town classes, especially RURBAN markets. In the confectionery segment, Kitkat and Munch in the confectionery segment experienced good growth, supported by consumer campaigns and new product launches.

Distribution expansion and innovation key growth levers

Despite a challenging environment, sales in the RURBAN markets saw a continued uptick in Q3, supported by strategic initiatives, such as portfolio diversification, infrastructure analytics platforms, and enhanced activation efforts. NEST expanded its direct coverage, reaching an additional 5,300 villages in Q3, bringing the total to 196,000 villages, nearing its goal of 200,000 villages. Innovation remains integral to NEST’s growth strategy, evident in recent launches including Maggi Korean noodles, Maggi Oats Noodles with Millet Magic, and Gerber Puffs.       

Key raw material prices of coffee and wheat remain stable

Gross margin was at 58.4% in Q3, up 380bp YoY, led by softer commodity prices and richer mix. NEST expects stable milk prices due to the Winter flush season but warns of potential price impact on maize, sugar, oil seeds, and spices, given the rain deficit. Wheat and rice prices remain steady, while coffee prices remain volatile. 

Valuation: reiterate Accumulate with a higher TP of INR 2,720

We believe increased rural distribution and rise in penetration will ensure robust sales growth. We raise our estimates by 2.5% for CY24 and 1.5% for CY25 to factor in higher-than-expected margin. We reiterate Accumulate with a higher TP of INR 2,720 from INR 2,600 based on 65x (unchanged) CY26E P/E as we roll forward.

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