Nestle India - Best Proxy On Great Indian Consumption Story: HDFC Securities

HDFC Securities Institutional Equities

We believe Nestle India Ltd. has the potential for double-digit revenue growth in the medium term, unlike peers struggling with high single-digit growth, owing to several factors:

1. ramping up its rural distribution network, currently underindexed;

2. focusing on substantial growth in its out-of-home channel;

3. prioritizing the salience of new product development and category creation efforts;

4. investing in capacity expansion (with a capex of Rs 65 billion over CY20-25) to align with long term penetration-led volume growth objectives;

5. India’s prioritization as one of the top 10 markets despite contributing only 2% of global revenue.

We also expect the Ebitda margin to expand c100 bps from FY24-27 to 25%, despite being at a decadal high, owing to operational scale improvements, premiumisation, and cost optimisation initiatives.

We upgrade Nestle to Add from Reduce with a target price of Rs 2,750 (70 times FY26 EPS) and recommend investors to accumulate the stock amidst any negative news flows.

Key near-term risks include-

1. elevated raw material index (particularly cocoa and coffee);

2. FSSAI probe on Cerelac, which, if unfavorable, could impact customer trust in other consumer infant milk and nutrition-related brands;

3. potential disproportionate increase in royalty/other payouts to the parent company (royalty rate is expected to increase from 4.5% in CY23 to 5.25% in CY28).

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