IGI Logo

Weak revenue growth; miss on all fronts

* Nestle India (Nestle) reported weak 3.3% YoY revenue growth (est. 8.6%) in 1QFY25. Last eight-quarter average revenue growth was 14%. Domestic sales grew 4.2% YoY, supported by volume growth and a favorable product mix. Export sales contracted by 7.2% YoY to INR1.8b.

* GM expanded 280bp YoY to INR57.6% (est. 55.5%). GP was up by 9% YoY. Input prices are seeing inflation, with coffee and cocoa prices hitting alltime highs. Cereals and grains (MSP led) are also seeing inflationary trends. Prices are stable for milk, edible oils and packaging. Nestle has seen a strong GM recovery (up 300bp) in the last 12 months; we model a limited expansion in FY25. With 11% growth in operating costs, EBITDA margin inched up 40bp. EBITDA grew 5% YoY to INR11.2b (est. INR12.1b).

* Nestle has been focusing on its RURBAN strategy and expanding its distribution reach in the untapped markets. E-commerce continued to deliver healthy growth, with double-digit growth in 1Q. During the quarter, Nestle added 800 distribution touchpoints and increased its village coverage by 5,000 to ~205,000 villages. Nestle posted broad-based growth across brands for the last few years. We reiterate our Neutral rating with a TP of INR2,500 (based on 60x P/E Jun’26E) due to expensive valuations.

Miss on all fronts

* Slowdown in domestic sales: Nestle saw a sharp deceleration in revenue growth in 1QFY25 as net revenue was up only 3.3% YoY to INR48.1b (est. INR50.6b). Domestic sales grew 4.2% YoY to INR46.1b, while exports contracted by 7.2% YoY to INR1.8b. Domestic growth was primarily driven by healthy volume and a favorable product mix.

* Broad-based growth across categories: Nestle sustained broad-based growth across segments, though revenue growth was low. Five of the top 12 brands clocked double-digit growth. Beverages business delivered doubledigit growth despite the scorching summer. Prepared Dishes maintained growth momentum, with innovations contributing to ~30% of growth. KITKAT delivered double-digit growth. E-commerce mix was 7.5% and growing at double digits.

* Gross margin continued to expand, up 280bp YoY at 57.6% (est. 55.5%). RM prices are seeing inflationary trends, especially in coffee, cocoa, cereals and grains. Employee/other expenses grew by 11%/12% YoY. EBITDA margin expanded by 40bp YoY to 23.3% (est. 23.8%). EBITDA rose 5.1% YoY to INR11.2b (est. INR 12.1b).

* PBT grew 6.9% YoY to INR10.2b (est. INR10.9b), and adj. PAT increased by 5.1% YoY to INR7.4b (est. INR8.0b).

* The board has recommended an interim dividend of INR2.75 per share.

Valuation and view

* There are no material changes to our FY25 and FY26 EPS estimates.

* 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 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 CY23. We estimate ~56% margin in FY25/FY26.

* Nestle’s portfolio is relatively safe from local competition; thus, operating costs have not accelerated unlike its FMCG peers. We believe the company will be able to sustain its EBITDA margin at ~25% for FY25/FY26.

* The stock trades at expensive valuations of 67x/61x FY25E/FY26E EPS. We reiterate our Neutral rating with a TP of INR2,500 (based on 60x P/E Jun’26E)

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412