Will Nestle ‘lead’ again with Maggi? How to trade stock now

Moneycontrol Bureau With the ever-growing problems that Nestle India is facing on domestic shores, the stock is getting beaten out of shape. It fell 12.5 percent alone in June and 11 percent year-to-date. Shares of Nestle India slipped 6 percent intraday on Monday. So should you buy the company which owns popular brand like Maggi noodles and Nescafe or is it time to dump it in the sink and flush it? Analysts are negative on the stock over health scare and is concerned that the negative sentiment may spill over to other brands of the company. Maggi noodles contribute around 20-25 percent to its revenue in India. Goldman Sachs recommends selling it with a target of Rs 4664 per share. It has lowered 2015-17 earnings per share (EPS) by 19 percent/10 percent /6 percent, reflecting lower Maggi noodles sales assumptions and higher advertising and promotions (A&P) expenses. “Our estimates revision are driven by order by the Central Food Safety and Standards Authority of India for Nestle to recall nine variants of its Maggi noodles, and voluntary product recall of Maggi noodles by Nestle until all regulatory issues are resolved,” it says in a report. It thinks that Nestle may have to bear incremental marketing spend to restore consumer confidence and curtail potential reputational damage to other products under its flagship Maggi Brand. Barclays also remains underweight rating with a hope that valuations are likely to be challenged by potential near-term disruptions, exacerbating an already muted consumer environment. It prefers Dabur instead in the basket, stating that despite the 12 percent decline in the stock price (over the last 5 days), it is still trading at a 15 percent premium to peers and historical average. The brokerage has a target price of Rs 5194 per share. According to Barclays, these are its headwinds, “Near-term impact on sales due to temporary bans by states and retailers, negative impact on consumer sentiment could spill over to other product ranges, product recalls and other remedial measures, if required, could hamper near-term margin profiles.” Maintaining a neutral rating, JP Morgan warns that negative impact of Maggi noodles recall may be long lasting. Although, it is optimistic about the company’s long-term potential given low penetration levels and the domination of unorganised players in the Indian processed foods industry, it believes current valuations discount this and cap potential upside. “Sharp inflation in milk/sugar/green coffee/ wheat/vegetable oil prices would significantly affect our margin assumptions and earnings growth estimates. Nestlé enjoys leadership positions in most categories in which it operates. However, any significant rise in competitive activity by existing players and/or the entry of new players could lead to higher A&P spending and have an impact on our margin/earnings assumptions,” it explains.

[“source – moneycontrol.com”]