GST transition likely to drag revenue growth
Most brokerages agree that the recent GST rate cuts have had a one-time impact on Nestle’s second-quarter performance. Kotak Institutional Equities expects a 425-basis-point hit to domestic revenue growth due to trade channel destocking, as distributors reduced inventories to avoid carrying stocks purchased at higher tax rates.
Kotak estimates 3.7% revenue growth YoY, led by 3.25% growth in domestic sales and 15% growth in exports, compared with 5.5% and 16% respectively in Q1. Volume growth could slow to around 1%, while price-mix growth may be about 2.3%.
Nuvama also projects 3% overall revenue growth, with domestic sales up 2.5% YoY and exports up about 5–6%. The firm noted that products like Maggi noodles, instant coffee, and confectionery — which now attract a 5% GST — saw aggressive destocking in late September, but added that restocking should begin from October, helping volumes in the festive quarter.
YES Securities expects a slightly better 6% revenue growth, supported by 5% domestic volume growth, while Motilal Oswal pegs overall sales at 5.3% YoY, led by a 5% domestic and 10% export uptick.
Margins to narrow amid high input costs
Despite steady demand in some categories, most analysts expect gross margins to contract by 90–130 basis points YoY, dragged by higher input prices. According to Kotak, gross margins could decline 100 bps YoY to 55.6%, while EBITDA margins may fall 100 bps to 21.9%.
Nuvama expects similar pressure, estimating a 132-bps fall in gross margin and 68-bps drop in EBITDA margin to 22.2%. The brokerage cited continued inflation in coffee and dairy inputs and limited ability to pass on costs post-GST rate cuts.
YES Securities, however, sees some offset from lower overheads and projects EBITDA margin contraction of 40 bps YoY to 22.5%, while recurring profit could remain flat. Elara Capital also expects margins to narrow due to subdued beverage and milk categories, estimating gross margin at 55.5% and EBITDA margin at 22.5%.
Category performance mixed
Brokerages expect prepared dishes and confectionery to perform better than the beverages and dairy portfolio. Elara Capital noted that strong early monsoons likely hit beverage consumption, while demand for milk and nutrition products stayed weak.
Nuvama added that Nestle’s price hikes of around 3% in coffee and premium chocolates provided a limited cushion against raw material cost inflation.
Outlook: Weak quarter but demand revival ahead
Analysts believe the impact of GST-related destocking will be temporary, with demand expected to bounce back from Q3 as distributors replenish inventory and lower product prices boost rural and small-town consumption.
Motilal Oswal said Nestle’s long-term fundamentals remain strong, citing the company’s continued focus on premiumization, innovation, and distribution expansion. While input cost pressures could persist through the near term, Nestlé’s leadership in key packaged food segments and its ability to drive brand-led pricing power are expected to support recovery in the coming quarters.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)
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