Reduce Nestle India Ltd For Target Rs. 2,300 by Emkay Global Financial Services Ltd
E-com drives Q1 sales growth; weak margins drag earnings
We maintain REDUCE with a Jun-26E TP of Rs2,300 (60x P/E), as we expect a gradual recovery in growth and margins. Past price hikes, driven by broad-based inflation, have weighed on performance amid demand stress. With raw material costs likely to ease, we foresee a slow rebound in operating metrics. The company’s Q1 performance was weak – while topline growth of 6% came in line, the flat EBITDA, and 11% YoY dip in earnings lagged consensus/our expectations. Our analysis suggests that domestic growth was largely led by e-commerce, which added Rs2.6bn YoY, nearly matching India revenue growth of Rs2.5bn YoY.
Topline growth at 6% driven by e-com
Domestic sales grew 5.5% YoY to Rs48.6bn, with ~3% estimated real internal growth. We estimate volume growth at ~2.5% in Q1FY26E. Export sales grew 16% to Rs2.14bn. Overall revenue grew 5.9% YoY to Rs50.7bn. E-com channel’s salience expanded 5% YoY to 12.5%. Ecom sales grew 76% YoY to Rs6bn. Our assessment suggests that e-com is driving the bulk of domestic sales growth for the company. From a segment growth perspective, we see high-teen growth for beverages and confectionaries; prepared dishes likely grew in mid-single digit (with positive volume), while milk products may have declined by low-single digit. The management noted that 7 of 12 brands registered double-digit revenue growth. We maintain an 8% revenue CAGR over FY25-28E.
Gross margin stress hurt OPM delivery; EBITDA flat, earnings down 10%
The gross margin at 55%, down by 250bps YoY, came lower than our estimated 56.5%. The company has been regular with price hikes which we thought would have helped the gross margin. However, it seems like trade spending and consumer promotions affected the gross margin. The management noted a surge in operating costs, given expansion in manufacturing capacities. On key raw materials, the management noted stability in edible oil and cocoa prices, a decline in coffee (expect it to be range-bound at current level; Vietnam supplies are expected to be normal), and a modest increase in milk prices (albeit easing is anticipated on favorable monsoon and flush season). The EBITDA margin at 21.7%, down by 130bps YoY, was below consensus/our expectations of 23.1%/22.3%. EBITDA came flat YoY at Rs11bn, 7%/2% below consensus/our estimate. Interest cost surged to Rs469mn, up 48% YoY, given higher borrowings to fund temporary operational cashflow needs. This, with an increase in the tax rate, drove adj PAT decline of 10.6% YoY (12%/5% below consensus/our estimate). We cut earnings by 2-3%, to factor in margin pressure. On gradual margin recovery, we see 11% earnings CAGR over FY25-28E. Our earnings estimates are 5-8% below consensus for FY25-28E.
Valuation remains elevated, requires healthy earnings ahead; maintain REDUCE
Strong parentage, premiumization potential, focused actions in rural markets, expected easing in raw material costs, and likely refinement in execution under the new leadership are factors that could keep valuations elevated (62x P/E on FY27E). Faster growth in the e-commerce channel is promising, as the company is better placed with the new CEO (experienced in managing one of the largest e-commerce platforms in India). However, limited revenue from other channels is concerning
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