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Weak revenue growth; miss on all fronts

* Nestle India (Nestle) reported weak revenue growth of 1% YoY (est. 6%) in 2QFY25. Last eight-quarter average revenue growth was 10%. Domestic sales grew 1% YoY, impacted by muted demand and higher commodity prices. Beverage, toddlers’ range and milkmaid posted high double-digit growth, while KitKat saw high single-digit growth. Thereby, prepared dishes, parts of the milk products and chocolates would have been the key drag in 2Q. Export revenue increased by 3% YoY.

* GM was flat YoY at 56.6% (est. 57.0%). GP was up only by 2% YoY. Input prices are seeing inflation, with coffee and cocoa prices remaining elevated. Cereals, grains (MSP-led) and edible oil are also seeing inflationary trends. Prices are stable for milk and packaging. Due to a 6% increase in operating costs, EBITDA margin contracted by 150bp YoY. EBITDA declined 5% YoY to INR11.9b (est. INR13.4b). Lower other income (down 79% YoY) and higher depreciation (9% YoY up) further impacted profitability.

* Nestle has been revenue growth outperformer (largely due to price hikes) for the last two years; however, given high base and price hike anniversarization, we have been building in normalized revenue growth. We have been positive on staples companies since the beginning of FY25 (on volume bottoming out and valuation comfort), but we were cautious on Nestle due to rich valuation and normalized earnings growth trajectory. We reiterate our Neutral rating with a TP of INR2,400 (based on 60x P/E Sep’26E).

Miss on all fronts

* Slowdown in domestic sales: Nestle saw a sharp deceleration in revenue growth in 2QFY25 as net revenue was up 1% YoY to INR51.0b (est. INR53.5b). Domestic sales saw 1% YoY growth to INR48.8b, impacted by muted demand and higher commodity prices. Exports rose 3% YoY to INR1.9b.

* Demand pressure in large part of portfolio: Nestle sustained broad-based growth across segments, though revenue growth was low. Five of the top 12 brands clocked double-digit growth. E-commerce contribution was 8.3% and growing by 38%.

* Commodity pressure on margin: Gross margin was flat YoY and down 100bp QoQ to 56.6% (est. 57%) after expanding in the last four quarters (~300bp). Prices of coffee and cocoa remain elevated, and the prices of cereals and edible oils have also risen. Milk and packaging costs have remained stable.

* Miss on Profitability: Employee expenses declined 3% YoY, while other expenses were up 11% YoY. EBITDA margin contracted by 150bp YoY to 23.3% (est. 25.1%). EBITDA declined 5% YoY to INR11.9b (est. INR12.5b). Lower other income (down 79% YoY) and higher depreciation (9% YoY up) further impacted profitability. PBT declined 8% YoY to INR10.4b (est. INR12.3b), and adj. PAT declined by 7% YoY to INR7.5b (est. INR9.0b).

* The company has seen an exceptional gain of INR1.8b on slump sale of business. It sold Nutraceutical Business to Dr. Reddy's and Nestlé Health Science Ltd. The company sold Nestlé Business Services division to Nestlé Business Services India Private Ltd (Formerly known as Purina Pet Care).

* In 1HFY25, net sales grew by 2%, EBITDA remained flat and APAT declined by 1%.

Valuation and view

* We cut our EPS estimates by 6% for FY25 and 4% for FY26 on weak revenue growth and moderation in the margins.

* The company has been focusing on its RURBAN strategy; hence, growth was higher in RURBAN markets. Most of Nestle’s categories have been reaping the benefits of distribution penetration. Packaged food penetration has improved in the tier-2 and rural markets. The company continues to focus on portfolio enhancement through ongoing innovation and premiumization initiatives.

* The GM trajectory has been volatile over the last three years. It was 57% in CY21, which then dropped to 54% in CY22. Owing to benign raw material inflation, GM expanded in FY24. With the increase in RM prices, we estimate 57% margin in FY25/FY26.

* Nestle’s portfolio is relatively safe from local competition, so it does not need much overhead costs to protect market share. We believe Nestle will be able to sustain its EBITDA margin at 24-25% for FY25/FY26.

* The stock trades at an expensive valuation of 70x/62x FY25E/FY26E EPS. We reiterate our Neutral rating with a TP of INR2,400 (based on 60x P/E Sep’26E)

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