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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:
ramping up its rural distribution network, currently underindexed;
focusing on substantial growth in its out-of-home channel;
prioritizing the salience of new product development and category creation efforts;
investing in capacity expansion (with a capex of Rs 65 billion over CY20-25) to align with long term penetration-led volume growth objectives;
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-
elevated raw material index (particularly cocoa and coffee);
FSSAI probe on Cerelac, which, if unfavorable, could impact customer trust in other consumer infant milk and nutrition-related brands;
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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