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Margins pressure, Long-term Outlook Remains Intact; Maintain BUY

Est. Vs. Actual for Q1FY26: Revenue – INLINE; EBITDA – MISS ; PAT – MISS

Changes in Estimates post Q1FY26

FY26E/FY27E – Revenue: -1%/-1%; EBITDA -1%/-1%; PAT -1%/-1%

Recommendation Rationale

• Mixed Performance with Margin Pressure: Nestlé reported a modest 2.5% YoY revenue growth, driven by strong double-digit growth in beverages and confectionery, along with a rebound in volumes for MAGGI noodles. However, the Milk and Nutrition segment delivered a mixed performance. EBITDA declined 1.3% YoY, with margins contracting 156 bps to 21.7%, impacted by a 250 bps drop in gross margins due to elevated input costs and higher operational expenses from expanded manufacturing. On the demand front, urban markets continued to grow, while RUrban markets also turned positive, indicating improving consumption trends.
• Improving Commodity Outlook: Input cost pressures persist, but key commodities are stabilising. Edible oil and cocoa remain range-bound, coffee prices have softened with a stable Vietnam crop outlook, and milk prices are expected to ease with a favourable monsoon and the approaching flush season. Overall, the outlook indicates a more benign cost environment ahead
• Change in Leadership: Mr. Manish Tiwary will take over as Chairman and Managing Director of Nestlé India, effective from Aug 1, 2025, succeeding Mr. Suresh Narayanan, who retires on 31st July 2025

Sector Outlook: Positive

Company Outlook: Positive.

A key downside risk to our call is continued volatility in raw material prices and subdued demand.

Current Valuation: 64x Mar-27 EPS (Earlier: 65x Mar-27 EPS )

Current TP: Rs 2,580/share(Earlier TP: Rs 2,675/share)

Recommendation: We remain optimistic about the company’s long-term prospects. However, we have cut our estimates in FY26E/FY27E by 1% each, considering the volatility in commodity prices. With an 11% upside potential from the CMP, we maintain our BUY rating on the stock.

Financial Performance

Nestlé India reported revenue of Rs 5,074 Cr in Q1FY26, reflecting a 2.5% YoY growth driven by modest volume expansion of 2.5% YoY. Gross profit rose 1.2% YoY to Rs 2,789 Cr, although gross margins contracted by 250 bps due to elevated consumption prices across the commodity portfolio. EBITDA declined 1.3% YoY to Rs 1,100 Cr, with margins compressing by 156 bps owing to gross margin pressure. PAT stood at Rs 659 Cr, down ~12% YoY, impacted by higher depreciation, increased interest cost due to a temporary spike in borrowings, and a sharp decline in other income.

Outlook

The outlook on Nestlé remains positive 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, the company 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 premiumisation 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. The company is viewed to have all the right levers for long-term growth.

Valuation & Recommendation

We expect Nestle's Sales, EBITDA, and PAT to grow at 10%, 13%, and 13% CAGR over CY22-FY27E, respectively. We maintain our BUY stance with a TP of Rs 2,580/share, representing an 11% upside from the CMP.

Other Highlights

Product performance:

• The Powdered and Liquid Beverages segment remained a key growth driver, delivering strong double-digit growth on a high base. NESCAFÉ strengthened its market leadership, gaining share through affordable offerings and premium expansions like NESCAFÉ Gold and Roastery. The Ready-to-Drink (RTD) portfolio also sustained robust momentum.

• The Prepared Dishes and Cooking Aids segment saw a strong recovery, with MAGGI noodles posting double-digit volume growth. Masala-Ae-Magic maintained solid traction, while the overall MAGGI portfolio benefited from improving consumption trends. Growth was supported by RUrban markets and Quick Commerce, with the Spicy range and Double Masala variants gaining strong consumer response.

• The Confectionery segment delivered strong double-digit growth, led by robust volumes. KITKAT was the key growth driver, gaining share and performing well in RUrban markets. MUNCH and MILKYBAR also posted solid double-digit growth. Growth was supported by rural acceleration, premiumisation, higher in-home consumption, and Quick Commerce. New launches included KITKAT Duo, Lemon n Lime, and Dark Sharebag.

• The Milk Products and Nutrition segment reported a mixed performance. While MILKMAID posted single-digit growth, the growing-up milk portfolio gained traction through renovation and market share expansion. Encouraging trends are emerging in select sub-segments.

• OHH: Nestlé India's Out-of-Home business continued its strong double-digit growth, emerging as the fastest-growing vertical within the Beverages and Foods portfolio. Nestlé Professional reached a key milestone with 1,000 Retail One kiosks, led by NESCAFÉ Corners, MAGGI Hotspots, and KITKAT Break Zones, further strengthening its position as a comprehensive solutions provider.

• Pet Food: The Pet Food business delivered strong growth, led by robust performance in the Cat portfolio, particularly Purina Felix and Friskies. Enhanced distribution and infrastructure in key cities supported wider market coverage. Employee-focused initiatives like the ‘Staff Pet Feeding Policy’ and ‘pawternity leave’ further reinforced Nestlé’s pet care commitment.

E-commerce

• E-commerce sustained strong momentum, contributing 12.5% to domestic sales, driven by Quick Commerce, new product launches, and targeted on-platform initiatives aligned with shopper preferences.

Key Risks to Our Estimates and TP

• Increase in competitive intensity

• RM inflation • Weakening of the demand environment

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