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Broad-based growth recovery; cash flows improve

* Nestle India (Nestle) has seen a strong recovery in FY26, with revenue growth of 15% YoY, supported by a rebound in volume growth (+11% in FY26 vs. broadly flat volumes in FY25). Volume acceleration was led by strong double-digit growth across Prepared Dishes, Beverages and Confectionery. Milk Products & Nutrition reported a modest 2% volume decline in FY26 (vs. mid-single-digit decline in FY25).

* Distribution expansion, innovation, improving accessibility and market share gains have boosted growth. Distribution network increased to 5.3m retail outlets (from 5.2m in FY25), extending the company’s presence to 0.22m villages (vs. 0.21m villages in FY25). Ecommerce contributes 12% of revenue in FY26.

* GP margin declined 130bp YoY in FY26 on rising RM prices. Commodity inflation remains a near-term overhang and could keep gross margin under pressure. However, ongoing productivity and cost-saving initiatives should help in reducing the impact at the EBITDA level.

* Nestle has an ongoing capex plan of ~INR50b for the last three years. FY26 capex was INR7.2b (3% of sales) and FY24/FY25 capex was INR22.4b/INR18.9b. Management’s incremental focus will be on operating efficiencies and better utilization. Lower capex and better working capital management helped the cash conversion cycle turn negative (-1 day vs 15 days in FY25). Cash generation improved significantly, with OCF/FCF increasing to INR50.5b/INR42.2b from INR29.4b/INR9.3b in FY25.

* In F&B, Nestlé maintained its best-in-class execution. We model a CAGR of 12%, 15% and 18% in revenue, EBITDA and APAT, respectively, during FY26-28E. The stock is trading at 68x/60x FY27E/FY28E EPS. Given its expensive valuation, we reiterate our Neutral rating with a TP of INR1,400 (based on 60x P/E Mar'28E).

Double-digit volume growth across categories, except milk and nutrition

* Milk Products & Nutrition (33% of sales): It was the weakest-performing category in during the year, with volume declining 2% and value growth remaining largely flat. Management indicated that performance improved in the second half, reflecting a gradual stabilization in demand trends.

* Prepared Dishes (32% of sales; includes Pet Foods): The category reported healthy volume growth of 12% and revenue growth of 17% in FY26, supported by the continued strength of the MAGGI franchise. Purina Pet Care portfolio delivered high double-digit growth. Its online sales nearly doubled (+97%) during the year.

* Beverages (16% of sales): Sales rose 26% YoY (double-digit growth in coffee), with volume growth of 18% YoY and realization growth of 6% YoY. The strong growth was led by the company’s focus on expanding coffee penetration and strengthening the relevance of the coffee category across consumer cohorts.

* Confectionery (19% of sales): Sales increased 33% YoY, with volume growth of 26% YoY and realization growth of 6% YoY, driven by improved demand, accelerated premiumization and the visi-cooler program. The company's visicooler program crossed 60,000 units by Mar’26, improving product freshness, visibility, and impulse purchases across retail channels

Valuation and view

* There is no material change to our FY27 and FY28 EPS forecasts.

* GST 2.0 stimulates consumption, drives affordability, and contributes to the overall growth of the FMCG sector. About 85% of the company’s portfolio has benefited from the GST 2.0, leading to strong volumes across LUPs and larger packs. Apart from macro tailwinds, Nestle’s own initiatives, such as its investments in brands, strengthening distribution, and increasing capacity, are cumulatively boosting strong performance delivery.

* Packaged food companies (15-20% crude linkage) are relatively less exposed crude compared to HPC players (25-30%).

* We model a CAGR of 12%/15%/18% in revenue/EBITDA/APAT over FY26-28E. The stock is trading at 68x/60x FY27E/FY28E EPS. Given its expensive valuation, we reiterate our Neutral rating on the stock with a revised TP of INR1,400 (based on 60x P/E Mar'28E).

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