Brokerages raise price target for Nestle India, retains ratings after Q3 results

EBITDA margin expanded to 24.4%, and EBITDA grew by 22% YoY, meeting expectations despite slightly lower revenue

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Several brokerages have raised the target price of Nestle India Ltd and retained its ratings after the company reported an operating profit of more than 20 percent for the third straight quarter. The stock gained 1.5 percent at 9.45am on the BSE.

Nuvama Research has increased the target price to Rs 29,165 from Rs 25,810 earlier, Prabhudas Lilladher raised its target price to Rs 25,471 from Rs 23,263 a share, while Nomura has increased its target price by 16.4 percent to Rs 28,100 a share from current market price.

Nestle's revenue for the September 2023 quarter increased 9 percent on-year, slightly below Bloomberg estimate of 11 percent, mainly due to a 10 percent decline in export sales. The growth was driven by expanding distribution in smaller towns and rural areas as part of Nestle's RURBAN strategy. However, volume growth remained strong at 4 percent, surpassing the estimate of 3 percent.

Gross margin improved significantly, reaching 56.3 percent, the highest in nearly two years, thanks to lower inflation and higher product prices. However, staff costs rose sharply by 23 percent on-year. EBITDA margin also expanded to 24.4 percent, and EBITDA grew by 22 percent YoY, meeting expectations despite slightly lower revenue.

Most key brands did well, except Maggi. The out-of-home (OOH) channel showed strong double-digit growth due to product improvements, expansion, and infrastructure investments. E-commerce revenue grew, but its share of total revenue dropped slightly from 6.5 percent to 6.1 percent on-quarter.

The company has warned of rising input prices due to bad weather. Prabhudas expects slow margin growth because of supply shortages, keeping prices high for items like edible oils, coffee, sugar, spices, and wheat in the short to medium term. Nomura expects that going forward, good winter milk production should stabilise milk prices. Yet, uneven rainfall and a rain deficit this year may harm wheat, maize, sugar, oilseeds, and spice production and prices. Robusta coffee prices also stay unpredictable.

"We expect a range-bound gross margin, given that 50 percent of the RM basket is firm and set to rise given adverse weather patterns," Prabhudas Lilladher said.

Nomura believes Nestle's strategy of expanding core products, cost savings, investing in high-growth items, and geo targeted distribution to bring sustainable medium-term growth.

Brokerage Motilal said Nestle's strong domestic market presence, innovative products, and focus on out-of-home and rural markets drive double-digit earnings growth. With investments in capacity, branding, and R&D, Nestle is well-positioned for long-term success in India's Packaged Foods segment, promising revenue, and earnings growth.

"We expect volume growth to improve as Maggi LUP price revision has mostly come in the base and 4Q will also get a boost from late Diwali. Long term growth drivers look intact given significant capex plans of the company. We factor in EBITDA margin expansion of 40bps beyond CY23 (23.6 percent with 140 bps improvement). We introduce a CY25 earnings estimate with a 12.2 percent EPS CAGR over CY23-25. We expect steady returns despite rich valuations of 58.8x September 2025 EPS," Prabhudas Lilladher said in its latest note.