Intensifying competition and possibility of further legal action to test expectations of recovery.
Nestle India (Nestle) scrip has fallen about 14 per cent in the past six months as a ban on its instant noodles brand Maggi (out of the market for the past five months) has had a severe impact on the company’s financials.
Notably, Maggi contributed about a fourth of Nestle’s revenues before the ban and, hence, plays a key role in its growth.
The company re-launched Maggi noodles last week just around Diwali to tap into festive demand.
While successful re-launch will aid Nestle’s prospects, recovery is unlikely to be smooth.
The instant noodles category has been impacted adversely after the ban with competitors such as Yippie noodles (by ITC) too feeling the pinch.
Increasing popularity and market positioning of new player Patanjali is also a key monitorable given that the company recently entered the instant noodles category by launching its own atta noodles.
Further, the Food Safety and Standards Authority of India has approached the Supreme Court on some issues regarding the Maggi re-launch.
Any adverse ruling in this case could have an impact on the company. In this backdrop, analysts’ expectation that the company might recover most of its lost ground in calendar year (CY) 2016 will be tested.
“We estimate Rs 1,481 crore (Rs 14.81 billion) of prepared dishes sales in CY15 compared to Rs 2,961 crore (Rs 29.61 billion) in CY14. However, post the Maggi noodles re-launch, revenue from prepared dishes could recover to Rs 2,703 crore (Rs 27.03 billion) in CY16,” says Sanjay Manyal, consumer analyst at ICICI Securities.
Notably, Maggi forms three-fourth of Nestle’s prepared dishes business.
However, not all analysts are as optimistic on Nestle. “Though the Maggi re-launch will result in resumption of growth from the first quarter of the CY16, our concerns over growth of the remaining portfolio, lack of a visible innovation pipeline and stretched valuations persist,” say analysts at IDFC Securities. These concerns stem from the fact that the company’s non-noodles business comprising chocolates, dairy products, beverages and infant food too felt the heat of the Maggi controversy in the September quarter as revenues fell 32 per cent year-on-year.
Price reductions as well as higher promotions in dairy products added to Nestle’s woes in the quarter, believe analysts.
Going ahead, the company is likely to invest back most of the gains from benign input costs towards higher ad spends on Maggi re-launch and to support other products.
This will keep the company’s margins under check.
The Street will also be keeping an eye out on the strategies adopted by new managing director Suresh Narayanan to achieve growth amid slowing consumption demand.
The success of Maggi will be key in determining the company’s prospects.
Nestle’s strong brand recall and market positioning are amongst its major strengths. The under-penetrated packaged foods market in India offers an attractive long-term growth opportunity.
At Tuesday’s closing price of Rs 6,075 per share, the Nestle scrip trades at rich valuations of 42 times CY16 estimated earnings, above its five-year average price-to-earnings ratio of about 40 times.
The upside potential, thus, appears limited from current levels. Most analysts polled by Bloomberg so far in November are cautious on the scrip.
Their average target price of Rs 5,870 indicates about a three per cent fall from current levels. Thus, investors should wait for sustained improvement to invest in the stock.