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Low base should support FY26 performance

Nestle India Ltd.’s (NEST) 4QFY25 revenues were in-line with our estimate as miss on export sales was compensated by sharp growth in other operating revenues. Domestic sales grew by 4.2% led by ~2% volume growth while exports de-grew by 8.7%. Challenges in mid-price Nutrition segment would have continued to put pressure on the overall growth of the domestic business we believe. While the sector is currently benefitting from resilient rural growth in the very near-term, NEST with high urban mix and higher base has seen relative growth pressures. Gross margins continue to remain under pressure on a YoY basis in 4Q, but the pain seems to have eased a bit led by price actions. EBITDA margins surprised this quarter led by lower overheads, but we think this might not be sustainable as company would want to invest for growth going forward. Growth and margin concerns witnessed in FY25 should start fading through the course of next fiscal led by lower base. Over FY25-27E, we are now building 12.4% EPS CAGR led by ~9% revenue CAGR. The stock currently trades at ~69x/61x FY26E/FY27E EPS and leaves little room for execution miss. We continue to assign ~60x on FY’27E EPS, arriving at a revised target price (TP) of Rs2,420 (Rs2,455 earlier). Maintain NEUTRAL.

4QFY25 Result Highlights (Standalone)

* Headline performance: Revenues (incldg. OOI) grew by 4.5% YoY to Rs55bn (vs est. Rs55bn). EBITDA flattish at Rs13.9bn (vs est. Rs12.9bn). Adjusted PAT (APAT) de-grew by 3.4% YoY to Rs8.85bn (vs est. Rs8.36bn).

* Domestic sales grew 4.2% YoY to Rs52.35bn (vs est. Rs52.4bn). As per media, volume has grown by ~2% in-line with our estimate. Exports (~3.9% of sales for the quarter) were down by 8.7% YoY to Rs2.1bn (vs est. Rs2.56bn). Other operating revenues grew sharply by 327% to Rs562mn.

* Margins: Gross margin was largely in-line at 56.2% (down QoQ by 20bps and YoY by 60bps). Savings in Other expenses (down 70bps YoY), which was partially offset by slight increase in Staff cost (up 20bps YoY) meant that EBITDA margin was down just 20bps YoY to 25.2% (vs. est. 23.5%).

* FY25: Comparable revenue & EBITDA were up 3.3% & 0.6%, resp., while APAT was down 5.3% YoY. Gross margin stood flat at 56.7% while EBITDA margin was down 60bps YoY to 23.6%.

* Other highlights:

* For FY25, Powdered and Liquid Beverages grew at high double-digits. Confectionery grew at a high single-digit pace both in value and volume driven by KITKAT. Prepared Dishes and Cooking Aids posted mid-single-digit growth with MAGGI returning to volume growth.

* Out-of-Home (OOH) business delivered strong double-digit growth and is emerging as one of the fastest growing businesses.

* Commodity outlook: Coffee continues to be firm. Cocoa prices have corrected but continue to be high. Prices continue to remain stable for edible oils. Milk prices have cyclically firmed up with the onset of summers.

* E-commerce (including Q-commerce) contributed to 8.5% of domestic sales.

* RUrban distribution touchpoints have increased to 27,730. NEST is now present in ~208,500 villages.

View & Valuation

We expect growth and margin concerns witnessed in FY25 to start fading through the course of next fiscal. Over FY25-27E, we believe earnings growth would be led by

* Capacity addition led push.

* Sweating of distribution assets especially in non-urban markets. NEST’s initiative on distribution reach and products catering to RURBAN portfolio is strengthening its position in rural areas but contribution remains low at 20-25% of domestic topline;

* Continued R&D led innovations leading to maintenance of growth in premium portfolio. Recently introduced new categories will only add to medium-to-long term earnings. Over FY25-27E, we are now building 12.4% EPS CAGR led by ~9% revenue CAGR. We continue to assign ~60x on FY’27E EPS, arriving at a revised target price (TP) of Rs2,420 (Rs2,455 earlier). Maintain NEUTRAL.

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