Should you buy Nestle India ahead of Maggi relaunch?

Given the performance in the September quarter and the fact that Nestle has begun production of Maggi noodles in three states, should you buy the stock?

Ban on instant noodle, Maggi, was evident in the financial performance of Nestle India in the September 2015 quarter, with the company reporting a 60% drop in net profit to Rs 124 crore compared to the corresponding period last fiscal. 

Net sales came in 32% lower at Rs Rs 1,736 crore, as compared to Rs 2,558 crore in the year ago period. The performance was below Street estimates. According to reports, Maggi contributes around 26%, or around Rs 2,500 crore to Nestle India’s yearly revenue of Rs 9,800 crore.

 

“Net sales declined 32.2% year-on-year (y-o-y) compared to our/Bloomberg consensus estimates of 20%/21% decline, respectively. Even adjusting for absence of Maggi noodle sales during the quarter and the impact of sales reversal, other segments also reported a (y-o-y) decline of around 11%. Thus other segments are struggling as well,” points out a post results note from Nirmal Bang Institutional Equities.

Post the results, the stock lost 1.1%, or Rs 70 at Rs 6,220 levels in intra-day deals on the Bombay Stock Exchange (BSE) on Friday. By comparison, the S&P BSE Sensex was trading 0.2% higher at 26,870 levels, though the BSE FMCG index slipped nearly 0.8%, dragged down by heavyweights like ITC, Emami, Marico and Colgate-Palmolive (India).

With Maggi noodles being recently declared safe for consumption, management intends to re-launch the brand as soon as the newly manufactured products are cleared by the three High Court designated labs.

Stock Strategy

Given the performance in the recently concluded quarter and the fact that Nestlé has begun production of Maggi noodles in three states after the brand cleared court-directed safety tests, should you buy Nestle India?

Most analysts suggest otherwise, and have maintained a ‘sell’ rating on the stock. 

Krishnan Sambamoorthy, an analyst trading the company at Nirmal Bang Institutional Equities, for instance, had assumed Maggi noodle sales resumption by the end of October 2015 and now expects the re-launch in December 2015.

“We expect Maggi noodle sales to bounce back to CY14 level in a couple of years. We have reduced our CY15 and CY16 EPS estimates by 21.9% / 22.7%, respectively, and revised our CY17 estimate marginally. EPS estimate reduction for CY15 and CY16 is because of a poor sales trend and likelihood of a relatively gradual recovery only in CY16. Nestle still needs to address the issue of overt premiumisation and falling market share in key categories that led to consistent volume decline in three out of its four segments even in the CY12-CY14 period, before the Maggi noodle health scare problem cropped up. We have retained Sell rating on the stock with a price target of Rs 5,721 levels,” he says.

At 43.3x/37.3x CY16/CY17 EPS, Gaurang Kakkad and Premal Kamdar of Religare Institutional Research find the valuations too expensive and have maintained a 'sell' rating on the stock with a target price of Rs 5,500.

As regards the re-launch, while there is positive newsflow for Nestle with 100% samples tested and lead being well under permissible limit, analysts await go-ahead/comments from FSSAI / Government authorities in regard to this development.

"We await the re-launch of Maggi noodles, but believe that in the interim, Maggi could face challenges of competitive pressure (existing brands beefing up communication & promotions and launch of new brands like Patanjali noodles at attractive price points) and res-christen the image of brand Maggi in the consumer’s mind. However, we believe given the strong brand equity of Nestle will eventually weather this challenges. Moreover, general slowdown in discretionary spending could also impact other segments," said Prashant Kutty, an analyst tracking the company at Emkay.

Manish Jain and Natasha Prakash of Nomura, however, have a contrarian view and believe that the company will emerge out of the controversy stronger and sooner than what most investors seem to expect. They have maintained a 'buy' rating on the stock with a target price of Rs 6,950.