Maggi ban: Should you sell Nestle India?

Nomura maintains a buy rating; ICICI Securities, Kotak Institutional Equities remain cautious

Nestle India has seen its stock plummet nearly 15% from around Rs 7,000 levels on May 21 on the National Stock Exchange (NSE), when food inspectors ordered the company to recall a batch of Maggi noodles from shops across the country citing high lead content, to Rs 5,940 levels in intra-day trade on June 04, 2015.

By comparison, the benchmark index the S&P BSE Sensex has lost 3.7%, while the S&P BSE FMCG index has slipped 5.5%.

The issue has since snowballed with several state governments proactively ordering sampling and lab testing to screen for violation of food safety standards. The state governments involved so far include Delhi, Karnataka, Haryana, Kerala, West Bengal, Bihar, Uttarakhand, Maharashtra, Tamil Nadu and Goa. Indian Army, too, has cautioned its soldiers.

Maggi, according to analysts' estimates, contributes around 22-25% of the company's overall revenues and its contribution to operating profit could be even higher at around 28-30%.

Stock Strategy

So what should you do with the stock then? Is there more downside or is this just a temporary phase?

Despite the ongoing controversy, analysts at Nomura maintain a 'BUY' rating on the stock with a 12-month target price of Rs 7,400.

"We believe the issue is yet to reach a logical conclusion, with conflicting reports out each day. We expect more clarity on the subject in the next few days and await a definitive conclusion before taking a call on the issue. Until the issue is conclusively settled, the brand's sales are likely to be hit," suggest Manish Jain and Anup Sudhendranath of Nomura in a recent report.

"However, 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," they add.

Sanjay Manyal, an analyst tracking the company with ICICI Securities, however, maintains a cautious view on the stock given the developments. He expects the company to significantly hike the advertising & promotion (A&P) spend to neutralise the impact of this controversy amid pressure on volume growth.

"We cut our target price on the stock to Rs 6,039 per share (45x its CY16E earnings) and maintain our HOLD rating on the stock," he says.

Analysts at Kotak Institutional Equities also maintain a cautious view for now. "We believe this event should make investors question the 'quality premium' attached to the company. A misplaced India strategy in recent years and sub-par EPS growth delivery have failed to impact this premium, we note. However, a slip-up on safety aspects (if true) and poor PR management of the event raise valid questions on the premium. Reiterate REDUCE with a revised target price of Rs 5,800 (Rs 6,200 earlier)," they said in a recent report.