Nestle Q2 Preview: Demand Recovery In Sight, But Coffee And Palm Oil Costs A Concern

Nestle India Ltd. is set to announce its second quarter results amid a period of steady but moderating growth momentum, with analysts anticipating a mixed performance across key segments.

While demand trends are showing gradual improvement as the urban consumption slowdown eases, margin pressures are likely to persist due to elevated input costs, particularly in coffee and palm oil.

Brokerage estimates suggest modest top-line growth supported by price hikes in premium categories and benefits from recent GST rate cuts, though temporary destocking by trade partners ahead of the tax change may weigh on near-term volumes.

As per Bloomberg estimates, Nestle’s consolidated revenue for the March quarter is expected to rise 5% year-on-year to Rs 5,350 crore, compared to Rs 5,104 crore a year ago.

Ebitda is likely to be flat at Rs 1,191 crore from Rs 1,168 crore, while margin is expected to contract to 22.26% from 22.88% a year ago. Net profit is seen rising to Rs 756 crore for the quarter from Rs 986 crore.

• Revenue seen 5% higher at Rs 5,350 crore versus Rs 5,104 crore

• Profit seen 23% lower at Rs 756 crore versus Rs 986 crore

• Ebitda seen 2% higher at Rs 1,191 crore versus Rs 1,168 crore

• Margin seen at 22.26% versus 22.88%

• Nestle operates across four key segments — milk products and nutrition, prepared dishes and cooking aids, confectionery, and powdered and liquid beverages.

• While the company has a strong portfolio of leading brands in categories with significant growth potential, its largest segment, milk and nutrition, which accounts for around 43% of revenue, has delivered weak growth over the past decade.

• This underperformance is attributed to heightened competition and regulatory restrictions on advertising in the infant milk substitutes category.

• Additionally, the company has not been particularly aggressive in expanding into new segments such as health food drinks and breakfast cereals.

• Goldman Sachs believes that the stock’s valuations are already at the upper end of its historical range, and current growth trends do not justify further upside.

• Key risks to its outlook include changes in market share in instant noodles, shifts in competitive intensity, success in new category launches, and regulatory developments affecting the infant nutrition segment.

Nirmal Bang | Rating: Hold | Target Price: Rs 1,205

• Nestle to post a topline growth of 5.1% year-on-year led by low-single digit volume growth.

• Gross margin is likely to decrease by 60 basis points year-on-year, but it increases 80 basis points sequentially.

• Expect the Ebitda margin to decrease marginally by 60 basis points year-on-year. However, it is up by 70 basis points sequentially to 22.3%.

• Ebitda to increase 2.4% year-on-year and profit to decrease 3% year-on-year.

Nuvama | Rating: Neutral | Target Price: Rs 1,585

• Nuvama Institutional Equities has listed Nestle India among its top picks, noting that the company remains one of the stronger performers in the FMCG space.

• The brokerage highlighted that coffee prices have seen a decent increase, with a hike of around 3% in the second quarter, particularly in the coffee and premium chocolate segments.

• However, it also cautioned that palm oil prices are up 18% from their lows, which could pose a slight concern for Nestle in the third quarter if the elevated levels persist.

• Nestle has undertaken price cuts ranging from 3% to 23% across its product range, with nearly its entire India portfolio benefiting from the recent GST rate cut, except for pet food and Nespresso machines.

• The GST rate reduction is expected to lower prices for consumers, but a temporary destocking by channel partners was anticipated before Sept. 22 to manage inventory bought at higher tax rates.

• Nuvama expects restocking to follow once new lower-priced goods enter the market, boosting consumer demand.

• Domestic sales are expected to rise 2.5% year-on-year, with volume growth of 1%.

• Export revenues are seen growing 5–6%.

• Ebitda is estimated to remain flat year-on-year, while gross and EBITDA margins are expected to decline by 132 and 68 basis points respectively, to 55.3% and 22.2%, owing to elevated coffee input costs.

• The brokerage also noted that the decline in profit on a yearly basis is largely due to an exceptional gain of Rs 1,797 million in the base quarter from a slump sale of business.

• Overall, Nuvama maintains a positive stance on Nestle, expecting gradual demand recovery, aided by easing urban slowdown and price benefits from the GST cut.

JM Financial | Rating: Reduce | Target Price: Rs 1,200

• Volume growth likely to be in low single digit.

• GM down 190 basis points year-on-year.

• GST transition to impact revenue performance.

• GPM to contract 190 basis points due to some RM uptick, translating in Ebitda decline.

Philip Capital| Rating: Neutral | Target Price: Rs 1,117

• Volume growth likely to be around mid-single digit.

• Expect 6% sales growth, after factoring in some impact of channel destocking.

• Beverage's growth to be in double digit, while Confectionary in high single digit and Prepared dishes in high single digit.

• Milk and Nutrition to be stable.

• Rebound in coffee prices, along with higher trade incentives to keep year-on-year Ebitda margins under pressure.

• Expect low single digit Ebitda growth for the quarter.

• Milk, Infant Nutrition, Noodles, Pasta, Sauce & Condiment, Chocolate, Coffee to benefit from lower GST. Together contribute to over 90% of domestic sales