5 June 2015
Update | Sector: Consumer
Nestle India
BSE Sensex
26,768
S&P CNX
8,115
CMP: INR5,997
TP: INR6,300 (+5%)
Neutral
Food safety concerns muddy the waters
Tangible (volume decline) + Intangible (Brand Equity) costs at stake
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
AvgVal. INRm/Vol‘000
Free float (%)
NEST IN
96.4
7500/4755
-9/1/17
578.2
9.1
188/31
37.2
Financial Snapshot (INR Billion)
Y/E Dec
2014E 2015E 2016E
Net Sales
98.1 109.0 123.6
EBITDA
Adj PAT
EPS (INR)
Growth (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
20.6
12.6
6.8
48.2
53.7
46.0
20.4
25.1
15.4
23.0
51.5
70.3
37.4
18.3
29.1
18.3
18.6
54.7
74.4
31.6
16.3
130.2 160.2 190.0
294.3 327.7 366.8
Shareholding pattern (%)
As on
Mar-15 Dec-14 Mar-14
Promoter
62.8
62.8
62.8
DII
4.5
4.7
5.3
FII
12.5
13.8
13.7
Others
20.2
18.7
18.3
FII Includes depository receipts
Stock Performance (1-year)
The event:
In the past few days, various state Food Safety authorities have
conducted quality tests on Maggi Noodles (Maggi) to ascertain whether
Lead and Monosodium Glutamate (MSG) levels are within permissible limits
or not. The controversy erupted when the Lucknow Food Safety and Drug
Administration found excess lead and MSG in Maggi after a few samples
were subjected to tests at Kolkata’s referral laboratory. Several other state
governments have conducted tests on Maggi samples to check for any
violation of the food safety standards and banned the product temporarily
(Uttarakhand, Tamil Nadu, Kerala, Gujarat, Delhi, Madhya Pradesh, Bihar
and J&K have issued a notification to ban the manufacture, storage,
distribution and sale of Maggi). The controversy has reportedly hurt sales as
several retailers (such as WalMart, Big Bazaar, Reliance and Metro) have
pulled Maggi off the shelves; the company is also facing a backlash on social
media websites.
Nestle India’s initial response:
Nestle India has defended itself and stated
that (press release appended in the note) as per internal tests conducted
on 1000 batches and independent lab test on 600 batches, Maggi is safe to
eat with lead levels well within the food safety limits specified by the Indian
authorities. However it has temporarily taken Maggi off the shelves till the
probe is over, citing “consumer confusion” around the product and
emphasized that the trust of the consumer and safety of the products
remains its top priority. At today’s press conference, Nestle’s Global CEO
Paul Bulcke stated that the company maintains the same food safety and
quality assurance standards for Maggi across the world, and it is
deciphering the reason for discrepancies in the company test results and
those conducted by the government authorities.
Likely impact of the controversy:
Even as we believe that Nestle will
eventually tide over the crisis by addressing additional requirements of the
authorities, we are of the view that the controversy around the product has
impacted the brand’s iconic status in the interim. Prepared Dishes &
Cooking Aids forms 29% of sales and Instant Noodles constitutes ~75-80%
of the segment revenues, in our view. Thus, we estimate that Maggi
Noodles contributes ~20% of revenues and ~25% of operating profit.
Besides the obvious impact on sales, the crisis could also hurt the operating
leverage of Nestle as Prepared Dishes & Cooking Aids was the only segment
during CY14 that was growing in volumes. However, we believe that the
impact on brand equity is more devastating because Maggi is widely
consumed by kids and restoring consumer trust could take time.
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Manish Poddar
(Manish.Poddar@MotilalOswal.com); +91 22 3027 8029
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.