IGI Logo

We retain REDUCE on Nestlé India and Mar-26E TP of Rs2,300, on 60x P/E. We see demand stress persisting in a major part of the portfolio, with demand for milk products continuing to see impact of healthy price hikes (amid inflation) and competitive pressure in prepared dishes. The Beverage and Confectionary portfolios fared well which in our view are price driven amid sharp inflation in coffee and cocoa prices. We see growth recovery being gradual, with macro recovery aiding, while easing in inflation is awaited. Q4 topline growth at 4% stood in-line, while better margin (at 25.5%, flat YoY) aided the 5% EBITDA beat, though earnings missed by 4% (fell 4% YoY) due to higher tax rate.

Topline growth continues to be muted; we see gradual growth recovery ahead

Nestlé India’s topline growth remains muted, with 4% domestic revenue growth. We estimate real internal growth at ~2%. Export revenue fell 8% YoY. Growth stress persists in milk products/prepared dishes, while beverage/confectionary saw double-digit growth. For FY25, Nestlé saw 3% growth, aided by high double-digit growth in beverages and a high single digit growth in confectionaries. Prepared dishes saw a mid-single digit FY25 growth. We estimate 3-4% decline in FY25 for the milk products segment. New products, launched since 2015, contribute ~7% of sales. The company has quickly scaled up its franchise in quick commerce, and has now logged ~8.5% of domestic sales for FY25.

EBITDA margin firm at 25.5%; we see flat margin for FY26E

With the steady raw material inflationary setting sustaining, the company has been effecting price hikes. Given the stressed demand setting, we see the company’s call to pass on the pressure as prudent (vs absorbing it – which will not help the topline growth much). Gross margin contracted by 100bps YoY to 55.7% in Q4, while EBITDA margin at 25.5% stood flat YoY. The management noted steady inflation in coffee, some easing in cocoa, and stable prices for edible oil. With the onset of summers, milk prices have started inching up. Amid demand stress and part raw material remaining inflationary, we see flat YoY margin for FY26E. On expectations of gradual easing in the raw material setting and improvement in mix, we build in ~120bps margin expansion over FY25-28E to ~24.8% in FY28E. We now see 8% sales CAGR and 12% earnings CAGR over FY25- 28E. With this report, we introduce FY28 estimates.

Weak earnings, but hope of recovery to keep valuations in check; REDUCE

Nestlé India continues to trade at premium valuation (63x P/E for FY27E), given its strong parentage, premiumization potential, actions in rural, and better execution. However, steady inflation in key raw materials and pressure on consumer wallets are hurting its performance. As we expect raw material pressures to gradually ease, we believe we will see actions from Aug-24 under the new leadership, toward enhancing growth with more India-focused launches and leveraging the parent brand portfolio. With fast execution in quick commerce, we see Nestlé India aligning capabilities with user needs.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration numbe