Nestle's mid-teen profit growth depends on stable demand, lower costs

Domestic volumes surged and exports grew sharply in Q3FY26, aided by GST reforms, though higher raw material costs weighed on margins, with management prioritising growth over profitability

Nestle India (Nestle) reported an 18.5 per cent Y-o-Y revenue growth in Q3FY26, indicating that packaged food companies were among the major beneficiaries of the GST reforms. Growth was broadly good. Domestic revenue growth was 18.3 per cent, well above consensus, with strong volume growth across most categories delivering double-digit value growth. Exports grew 23 per cent Y-o-Y.

 

Nestle’s net sales were reported at ₹5,644 crore. Domestic sales grew to ₹5,400 crore with the best volume growth in several years. Exports grew 23 per cent Y-o-Y to ₹240 crore. But margins were under pressure with raw material inflation. The gross margin contracted 70 basis points (bps) Y-o-Y to 55.7 per cent. The operating profit margin contracted 170 basis points Y-o-Y to 21.7 per cent.   

Operating profit grew 10 per cent Y-o-Y to ₹1,230 crore while adjusted net profit grew 12 per cent Y-o-Y to ₹770 crore. The reported net profit stood at ₹1,018 crore, declining 46.2 per cent Y-o-Y. The exceptional items include ₹312 crore benefit from write-off of earlier tax provisions, as well as ₹35 crore for restructuring costs, and ₹10.4 crore for the one-time cost of the labour code. In 9MFY26, Nestle’s revenue and operating profit grew 12 per cent and 5 per cent, respectively, while adjusted net profit 

declined 2 per cent Y-o-Y. 

Nestle’s marketing investments in pushing brands, strengthening its distribution network, and capex for capacity expansions, are starting to pay off. A focus on “R-URBAN” has led to improved distribution as packaged food has started to catch on in Tier-II, Tier-III towns and in rural areas. 

The firm has also benefited from broader market recovery following GST 2.0, with almost all the portfolio benefiting. Management remains committed to growth rather than worrying about margins. In Q4, similar growth rates may be possible, given a low base effect. Guidance was that milk and edible oil prices would remain elevated in Q4, while coffee may be range-bound or ease down given good harvests. Management is optimistic about the upcoming wheat harvest in April’26. About 85 per cent of the portfolio has directly gained from the GST reforms apart from the generic consumption boost. 

Confectionery grew the fastest with strong volume expansion. Prepared dishes and cooking aids products also registered strong volume growth. Powdered and liquid beverages category recorded double-digit growth while the milk products and nutrition group reported mid-single-digit growth. The pet food business posted double-digit growth.While valuations are high with Nestle trading at over 65 times FY27 earnings, the growth was very encouraging with the best volume expansion in several years.  

Operating profit is likely to rebound with 200-300 bps margin expansion until FY28 as capex eases off. The growth strategy depends on deeper R-URBAN penetration and innovation, with around 125 product launches over the past seven years. Nestle is also trying to push premiumisation, and it’s moving into potential growth areas with Nespresso, Purina Pet Care, and Gerber’s toddler nutrition, trying to increase consumer engagement. Brand building has been supported by higher advertising spends, investments in distribution, and portfolio expansion, and improving quick-commerce penetration. Differentiated offering in Maggi, Kitkat and core coffee brands like the Nescafe range were key growth drivers. Milk category saw improved performance though growth rates were lower. The new pet food segment delivered double-digit growth. 

The e-commerce channel saw sustained growth, with good offtake for new products, enhanced platform availability. The high valuations are close to the historical norm for the multinational but an increase in competitive intensity could impact margins again since that could force the company to absorb elevated marketing and ad-spends. Persistent raw material inflation would also be a concern for the entire sector.  

Nestle has bet big on a trend of increasing rural and semi-urban demand with the assumption that margins will recover once capex eases off and raw material costs settle down. That rests on several assumptions including strong, sustained demand that allows for premiumisation. If all goes well, revenue and operating profit should grow at mid-teens rates through the next two fiscals.