Reduce Nestle India Ltd for the Target 1,350 by Emkay Global Financial Services Ltd
Nestlé reported strong 1QFY27 results, with a beat on all fronts. Revenue growth was strong (+25% yoy) on a favorable base, ahead of expectations. Volume growth stayed in double digits driven by continued focus on distribution expansion, especially in rural. Growth was broad-based, with all segments reporting double-digit growth, including Milk Products and Nutrition, which had lagged in the past. Gross margin expanded sharply by ~210bps yoy on price hikes and improved mix, in our view. EBITDA margin expansion was higher at ~250bps yoy, as elevated advertising spend (>40% yoy) was offset by a sharp cut in staff costs (-120bps yoy). Overall, it was another strong quarter with 40% EBITDA growth. We believe the stock has already priced in this superior operating performance (up ~28% since March lows vs ~7% for Nifty 50). We expect margin to be under pressure in 2Q on higher input costs, and growth to moderate in 2H on a high base. We raise our earnings estimates by ~2% to factor in the strong 1Q results but retain REDUCE with an unchanged TP of Rs1,350, on expensive valuation (currently trading at 1Y fwd PER of ~70x).
1QFY27 results summary
Revenue grew 25% yoy on a favorable base (~5% in 1QFY26) and was 5% ahead of consensus estimates. Gross margin was up ~210bps yoy to 57.2% (up ~160bps qoq). Advertising spend was up 40%+ yoy, while staff costs grew at a much slower pace (+11% yoy). EBITDA grew 40% yoy (14% beat vs consensus), with EBITDA margin at 24.1%. PAT grew 49% yoy and was 16% ahead of consensus expectations.
Double-digit growth across all categories
Confectionery: volume-led growth, led by premiumization and e-com. Beverages: double-digit growth for the 20th straight quarter, driven by increased coffee penetration and premiumization. Prepared Dishes and Cooking Aids: performance driven by continued rural expansion and innovations. Milk Products and Nutrition: strong broadbased, volume-led growth after several quarters of relatively weak performance.
Within channels, quick commerce (QC) remained the key growth driver
E-commerce continued its strong growth momentum, led by QC on the back of improved product availability, platform-specific pack portfolio, and media investments. We estimate e-commerce salience has reached mid-teens of domestic sales (from 12.5% in 1QFY26). The organized channel also delivered double-digit growth across key categories.
Mixed commodity outlook
Coffee prices are expected to be benign (surplus production in Brazil and Vietnam), with wheat and milk likely to remain range-bound. However, cocoa and sugar are likely to remain under pressure, and edible oil is expected to be stable but at elevated levels. The protein complex is facing inflationary pressure due to increased demand.
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