Nestle India's Premium Growth Story Reflects in Stock Market Valuation
Nestle India Ltd finds itself in an enviable position as its shares hover near the 52-week high mark of ₹1,339.60, achieved on January 30. The company's impressive December quarter (Q3FY26) results, announced recently, provide substantial support for this stock performance, showcasing the packaged-food giant's strongest volume growth in nearly five years.
Robust Quarterly Performance Exceeds Expectations
According to analysis from Nomura Financial Advisory and Securities (India), Nestle India's volume-plus-sales-mix growth reached an impressive 16% year-on-year during Q3FY26. This figure significantly surpassed the firm's forecast of 8% year-on-year growth and represents the highest performance among industry peers. The company benefited from improved consumer demand amid broader market recovery following the reduction in goods and services tax rates.
Strategic investments in capacity expansion and brand building have played crucial roles in driving this growth. Notably, Nestle increased its consumer-focused media and advertising spending by 42% year-on-year during the last quarter. These combined factors enabled the company to report multi-quarter high revenue growth that exceeded market expectations.
Product Category Performance Highlights
Total revenue from product sales increased by 18.5% to ₹5,643 crore, with domestic revenue at ₹5,402 crore showing an 18.3% rise. This follows double-digit revenue growth in the previous quarter as well, indicating sustained momentum.
Confectionery emerged as the fastest-growing product group, fueled by a significant surge in underlying volumes. Within this category, KitKat achieved high double-digit growth, particularly in rural areas, while Munch showed similar strong performance. Powdered and liquid beverages marked their 18th consecutive quarter of double-digit growth, demonstrating remarkable consistency.
Prepared dishes and cooking aids witnessed strong double-digit value growth, with Maggi Noodles posting double-digit volume growth specifically. Milk products and nutrition grew by mid-single digits, though certain segments within this category outperformed others.
Margin Dynamics and Strategic Investments
The substantial increase in advertising expenditures, while beneficial for volume prospects, has impacted profit margins when combined with higher raw material expenses and staff costs. The Ebitda margin contracted year-on-year by 186 basis points to 21.2%, while the gross margin declined 66 basis points to 55.7%.
Nuvama Institutional Equities maintains that this approach represents the right strategy, stating: "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." The broking firm has raised its FY27-28 estimated revenue by 4-5% while maintaining Ebitda estimates due to anticipated continued advertising investments.
Commodity Price Trends and Future Outlook
Commodity prices significantly influence margin development, and Nestle has highlighted several key trends. Milk prices have remained firm despite the flush season, driven by robust demand. Edible oil prices remain elevated and are expected to trade sideways during the first half of 2026. The wheat harvest anticipated in April appears promising, while coffee prices have stabilized and are lower year-on-year due to favorable crop yields in Vietnam and India.
With three of four key commodity prices turning favorable, Nomura expects quarter-on-quarter margin improvement to continue, potentially driving year-on-year double-digit Ebitda growth in Q4, up from 9% in Q3. A favorable base for the next two quarters should help Nestle sustain its growth momentum, especially considering that total revenue growth in Q4FY25 and Q1FY26 stood at just 4% and 6%, respectively.
Market Performance and Valuation Assessment
Against this backdrop, Nestle India's stock has gained approximately 12% over the past year, sharply outperforming the Nifty FMCG index's decline of similar magnitude. Currently trading at almost 62 times estimated FY27 earnings according to Bloomberg consensus, the company's brighter prospects appear adequately factored into its valuation for now.
Nuvama's analysts believe "Nestle shall continue its strong growth and shall continue getting a premium valuation multiple to its peers." However, Motilal Oswal Financial Services has reiterated its 'Neutral' rating with a revised target price of ₹1,400, citing expensive valuation as a key consideration.
The company's strategic focus on premiumization, coupled with favorable market conditions and disciplined investment in brand building, positions it well for sustained growth in the competitive FMCG landscape.
