Maggi ban: Noodles safe, says CEO; Nestle India tests Rs 6,000 levels

Analysts have already trimmed their growth forecasts for the company and revised downward the target price for the stock

Nestle India rebounded in noon deals today after Paul Bulcke, CEO, Nestle SA re-iterated in a press conference that Maggi noodles are safe for consumption and that Nestle does not add MSG (monosodium glutamate) while manufacturing the product.

After opening at Rs 5,850 on the Bombay Stock Exchange (BSE), the stock touched an intra-day low of Rs 5718.20 in intra-day deals before climbing to Rs 6,127 around 12:15pm.

However, the stock gave up most of its gains and was hovering around Rs 6,000 levels around 12:30pm. Since May 21 when the when food inspectors ordered the company to recall a batch of Maggi noodles from shops across the country citing high lead content, the stock has lost over 15%.

According to reports, many stares including Uttarakhand, Gujarat, Assam, Tamil Nadu and Jammu & Kashmir have already banned sale of Maggi for up to three months. Delhi, too, has banned sale of Maggi noodles for 15 days. Uttar Pradesh, however, where the Maggi controversy had broken out, is yet to ban the product. CLICK HERE FOR THE DETAILED REPORT

According to Nestlé, it has tested samples in-house from 1,000 production runs of the noodles. Separately, it asked an independent lab to test samples from another 600 production runs, reports suggest.

Given the controversy, analysts have trimmed their growth forecasts for the company and revised downward the target price for the stock. Nomura, however, in June 03 report remained bullish on the stock with a target price of Rs 7,400.



"From a longer-term perspective, the franchise remains intact, in our view, given its nearly three-decade old presence and considerable size. We would wait for the final results before taking a long-term view. Also, much will depend on how Nestle addresses the issue," the foreign brokerage said in the report.

Abneesh Roy of Edelweiss believes that given the controversy, Nestle’s volumes will come under pressure due to the negative brand perception on Maggi.

"Moreover, apart from the brand, the issue could impact the company’s other offerings as well. With the stock at 45.8x CY16 P/E, we downgrade recommendation/rating to ‘REDUCE’ from ‘HOLD’ with a revised target price of Rs 5,641,” he says.



Reliance Securities, too, has downgraded the stock rating to 'REDUCE' from 'NEUTRAL' with a target price of Rs 5,404 (Rs 6,759 earlier).

“The general sense is that if Maggi loses share because of bad publicity, the no.2 and no.3 players in instant noodle space viz. ITC and Nissin respectively will gain market share; we defer to this presumption, as the dent on reputation extends to the category in general and not just a particular brand,” Chitrangda Kapur, an analyst tracking the company with Reliance Securities said.

“We also factor muted volumes of 1-2% y-o-y growth in the milk based brands for Nestle India; and our PAT estimates are pruned by 15%/20% in CY15E/16E to factor massive brand building exercise that Nestle will have to undertake,” she adds.