Nestle India Ltd could be a beneficiary of the much-awaited boost to urban consumption from the budget as and when it starts to trickle in. The company derives around 75% of its sales from the urban market.
In a recent meeting with analysts, the management displayed confidence about the long-term prospects given the industry’s compelling growth opportunity led by relatively low per capita packaged foods consumption.
But there are near-term challenges. Like many other consumer-focused companies, Nestle too is facing the wrath of the general dull demand conditions in the country, which is marked by moderating urban demand and comparatively faster rural growth. High food inflation is another factor hurting growth. The pressure is evident. Nestle’s year-on-year domestic volume and sales growth was flat and at 3%, respectively, for the nine-month ended December (9MFY25). Sales growth was led by price hikes.
The sharp rise in coffee (over 75%) and cocoa prices pushed Nestle to take price hikes, weighing on volume growth. The company can be forced to take further hikes if the pricing pressure sustains. “Commodity prices continue to be firm for coffee, cocoa and cereals and grains. Prices of edible oil have stabilised. Prices continue to remain stable for milk and packaging,” said the company while announcing its December quarter (Q3FY25) results. Nestle’s gross profit margin contracted 221 basis points year-on-year in Q3 to 56.4% due to input cost inflation.
Against this backdrop, Nestle’s shares hit a 52-week low of ₹2131.25 on 29 January and are currently just about 5% higher than this level. The stock trades at nearly 65 times estimated earnings per share for FY26, showed Bloomberg data.
“Though valuations are attractive versus the relative past, we await improvement in the setting for rebound of execution-driven growth,” says a report by Emkay Global Financial Services. Easing inflation and improving volume growth is key to the stock’s fortune ahead.
Meanwhile, efforts to boost growth continue. One focus area for Nestle is premiumization where the management believes the opportunity size is ₹7,500 crore. According to the company, its premium portfolio has grown at 16% CAGR since 2015. Separately, the contribution of new products sales stood at 6.5% for 9MFY25 and the ambition is for this to reach 10% in the medium-term. Nestle has expanded its capacity for Maggi, coffee, and chocolate by 35% since 2020 with a capex of ₹5,500 crore, which could aid in accelerating growth.
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