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Q2 – Robust topline growth offsets weaker margins

We maintain REDUCE on Nestlé India, with a Sep-26E TP of Rs1,250, on 60x P/E (consistent with its last 10-year average forward P/E multiple). We believe Nestlé's new leadership will prioritize reviving topline growth; we evidenced this in Q2FY26, with domestic sales growth at 11% (driven by high single-digit volume growth; increased promotional activity likely supported the performance). We estimate non-digital channels’ sales growth in mid-single digits. Given favorable industry tailwinds from GST rate reduction (now, 5% rate effective for the company), we believe the management's topline focus is prudent. The company’s current margins are healthy and are unlikely to see material expansion ahead. We project 9% sales and 12% earnings CAGR over FY25-28E. Q2 results were mixed, with the stronger topline offsetting weaker margins, resulting in an in-line performance.

Q2 topline growth of 11% is encouraging; sustainability key ahead

Trade disruption, led by GST changes and monsoons, affected Q2. Despite this, Nestlé India delivered execution-led 11% revenue growth. The high single-digit domestic volume growth in Q2 was aided by double-digit growth in the Maggi portfolio. While the company has stopped calling out e-commerce’s revenue salience, assuming a steady 12.5% mix (like Q1FY26), e-commerce’s growth would have been 66% YoY. This means that other channels saw sales growth of 5.7%. Of the 4 segments, milk products require improvement, where GST relief can come in handy. Confectionaries saw double-digit growth, with Kit Kat driving growth, followed by Munch and Milkybar. Beverages continue to enjoy double-digit growth, with healthy pricing. Prepared dishes saw strong volumes, leading to double-digit growth. Exports saw 14% growth. As on 30-Sep-25, inventory days were 42 (down 10 days) and receivable days were 5 (down 1 day).

Q2 EBITDA in line, with weak margin delivery

In our opinion, the healthy topline came at the expense of margins (Q2 gross margin dropped by 215bps YoY and 80bps QoQ). We attribute this to higher trade and consumer promotions, which would have been aligned with addressing trade needs before GST’s implementation. The company has managed the GST situation relatively better. It rationalized its operating expenses (-145bps YoY) and managed EBITDA contraction at 105bps YoY to 22%. Q2 was the fifth consecutive quarter of earnings decline. Ahead, we see the management’s thrust being on the topline, which will keep margins in a band.

Accelerating earnings key for valuations; maintain REDUCE

Nestlé, under the new leadership (Manish Tiwari), is looking to revive its growth trajectory, which has been under stress for the last 6 quarters (mounting inflation first affected growth and then the margin). Ahead, raw material prices are likely to stabilize; GST benefit will help demand, with the possibility of double-digit growth sustaining. Growth flowing through to earnings would be key for valuations.

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