Competitive pressures, valuations leave little room for Nestle India upside

Nestle India saw subdued revenue growth of 4.5 per cent on-year during the fourth quarter of the financial year 2024-25 (FY25), on a high base of 9 per cent and 100 basis points gross margin contraction due to inflationary pressures in coffee, edible oil and palm oil.

 

There was double-digit growth in the beverages and confectionery categories, due to price hikes. But growth was muted in the prepared dishes and milk nutrition segments.

 

Nestle has appointed Manish Tiwary as managing director for a five-year term starting April 1, 2025. This may lead to a shift in the strategy which is monitorable.

 

Nestle’s total revenue rose 4.5 per cent year-on-year (Y-o-Y) to ₹5,500 crore. Domestic sales saw 4.2 per cent Y-o-Y growth to ₹5,230 crore. Exports saw 9 per cent decline Y-o-Y to ₹210 crore with coffee exports taking a hit.

 

The operating profit margin expanded marginally by 10 basis points Y-o-Y to 25.6 per cent (23.4 per cent in Q3FY25). Operating profit grew by 5 per cent Y-o-Y to ₹1,410 crore while adjusted net profit declined 4.5 per cent Y-o-Y to ₹870 crore.

 

For FY25, net sales rose 3 per cent Y-o-Y and operating profit grew 1 per cent Y-o-Y, while adjusted net profit dipped 4 per cent Y-o-Y (on a comparable basis). Quick commerce is witnessing strong growth and now contributes 8.5 per cent of overall revenue.

 

Within the segments, powdered and liquid beverages were the largest growth contributor with high double-digit growth driven by Nescafe (pricing led growth).

 

Confectionery value and volume grew in high single-digits driven by Kitkat; prepared dishes and cooking aids posted mid-single digit growth with recovery in Maggi volumes. While milk products and nutrition performance was soft, its cat food brands (Purina Felix and Friskies) achieved high growth, and initial response for dog food brand (Purina Pro Plan) is encouraging. The out-of-home business saw strong double-digit growth. 

 

In FY25, Nescafé strengthened its leadership position gaining market share. Nescafé ready-to-drink cold coffee range, one of the fastest growing globally, expanded its new range to India. A focus on new product launches (such as Cerelac variants with no refined sugar) continues, along with increasing distribution penetration. Nestle also launched KitKat Raspberry, MUNCH Maxx Nuts, and KitKat Salted Caramel during FY25.

 

Gross margin contracted by 98 basis points Y-o-Y to 55.7 per cent. Management highlighted that coffee continues to be inflationary, cocoa prices have corrected but continue to be elevated, prices of edible oil have stabilised, and milk prices have seasonally inched up. Inflation moderation may result in up to 110 basis points of margin improvement over FY25-27, assuming sustainable price hikes and premiumisation of portfolio. 

 

A major capital investment is underway with the establishment of Nestlé India's tenth factory in Odisha. The facility, focused on the prepared dishes and cooking aids portfolio, involves an initial investment of ₹900 crore. The capex may add to depreciation charges.

 

The company has relied on price hikes to defend margins. It needs to focus on cost metrics and improve employee productivity. The staff cost as a percentage of sales is about 10 per cent versus 4-7 per cent for peers. More competition in noodles and gap in pricing over local brands are concerns.

 

Moderate urban consumption and high inflation also pose risks for a high valuation stock. At a price to earnings of 66 times on FY26 estimates, any growth may be factored into the price.