Nestle India’s premium growth reflects in its premium valuation
Nestle India is near its 52-week high, buoyed by impressive Q3FY26 results that showcased the strongest volume growth in five years. With a strategic increase in advertising and a favourable market recovery, the company is positioned for continued success.
Nestle India Ltd’s shares are flirting with the 52-week high of ₹1,339.60 attained on 30 January. The December quarter (Q3FY26) results announced on Friday could well support the stock. After all, the packaged-food company’s volume growth for the quarter was the strongest in almost five years.
“Volume-plus-sales-mix growth was at 16% year-on-year, in our view, much above our forecast of 8% year-on-year and the highest among peers," Nomura Financial Advisory and Securities (India) said in a report.
Nestle benefited from improved demand amid the broader market recovery following the reduction in the goods and services tax rates. Strategic investments in increasing capacity and building its brands helped growth.
The company increased consumer-focused media and advertising spending by 42% year-on-year last quarter. Collectively, these factors helped Nestle to report multi-quarter high revenue growth in Q3, surpassing the Street’s estimates.
Total revenue from sale of products increased 18.5% to ₹5,643 crore, within which domestic revenue at ₹5,402 crore was up 18.3%. The company’s revenue grew in double digits in Q2 as well.
Nestle said confectionery was the fastest-growing product group, fueled by a surge in underlying volumes. Within confectionery, KitKat grew in high double digits, especially in rural areas, as did Munch.
Powdered and liquid beverages marked 18 straight quarters of double-digit growth. Prepared dishes and cooking aids saw strong double-digit value growth; here, Maggi Noodles posted double-digit volume growth. Milk products and nutrition grew by a mid-single digit, with certain segments outperforming others.
The significant step-up in ad-spends bodes well in lifting volume prospects but coupled with higher raw material expenses and staff costs, profit margins have taken a beating. The Ebitda margin contracted year-on-year by 186 basis points to 21.2%, while the gross margin plunged 66 bps to 55.7%.
Right approach
“Ad-spends will stay elevated but will lead to volume-led double-digit revenue growth in at least next three quarters, which we believe is the right approach," said Nuvama Institutional Equities. The broking firm raised its FY27-28 estimated revenue by 4-5%, but maintained Ebitda estimates due to expected increase in ad-spends.
Commodity prices too influence how margins shape up. Nestle highlighted milk prices have not softened despite the flush season, driven by robust demand. Edible oil prices are elevated and are expected to trade sideways in the first half of 2026. The wheat harvest expected in April looks promising. Coffee prices have stabilized and are lower year-on-year due to favourable crop yields in Vietnam and India.
With prices of three of the four key commodities turning favorable, Nomura expects quarter-on-quarter margin improvement to continue, driving year-on-year double-digit Ebitda growth in Q4, up from 9% in Q3.
A favourable base for the next two quarters should help Nestle sustain the growth momentum. For perspective, total revenue growth in Q4FY25 and Q1FY26 stood at 4% and 6%, respectively.
Against this backdrop, the stock has gained about 12% in the past year, sharply beating the Nifty FMCG index’s drop of similar quantum. At about 70 times estimated FY27 earnings, as per the Bloomberg consensus, the brighter picture seems adequately factored in for now.
“Nestle shall continue its strong growth and shall continue getting a premium valuation multiple to its peers," reckon Nuvama’s analysts.
However, Motilal Oswal Financial Services reiterated its ‘Neutral’ rating with a revised target price of ₹1,400 for the stock, given its expensive valuation.
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