Nestle: Muted near-term outlook for non-noodles biz

Full impact of Maggi re-launch will be visible only in the March quarter

Nestlé India (Nestlé) had a tough 2015, with the Maggi (which formed about a fourth of Nestlé's revenues before the ban) issue looming large over its prospects. That has led to an 18 per cent drop in the scrip in the past year, twice that of the S&P BSE Sensex’s nine per cent fall. Despite Maggi’s relaunch, Nestlé's woes are far from over, as the performance of its non-noodles portfolio too has been softening in recent quarters. Analysts estimate this business' revenues fell nine per cent year-on-year (y-o-y) in the quarter ended September 2015 and three to four per cent in the June  quarter. The company’s non-noodles business comprises chocolates, dairy products, beverages and infant food. For the December quarter Nestlé's non-noodles revenues could grow flattish to two per cent y-o-y. A slowdown in consumption demand has also hit the company’s non-noodles portfolio.

Analysts at Antique Stock Broking estimate that Maggi sold 33 million packets in the first 10 days since its re-launch on November 9. They have assumed Maggi sales to be 165 million packs and revenue of Rs 200 crore in the quarter. The instant noodles category has been impacted adversely after the ban, with competitors such as Yippie noodles (by ITC) also feeling the pinch. The full quarter impact of the Maggi re-launch will be visible only in the March 2016 quarter. Recent reports suggest the Supreme Court has asked a lab in Mysuru for test reports. The Food Safety and Standards Authority of India (FSSAI)'s appeal against the re-launch will also be heard soon in the apex court. Any unfavourable outcome will put additional pressure on the Nestlé scrip.

Not surprisingly, the scrip reached a 52-week low of Rs 5,410 on Wednesday. It trades at 41 times the calendar year 2016 estimated earnings, higher than its historical average one-year forward price to earnings ratio of 40. Analysts have a mixed view on the stock, with 45 per cent having a neutral view and the rest divided equally between buy and sell calls.

The Street will watch out for the implementation of new chairman Suresh Narayanan's strategies to grow all businesses. The company's pricing strategy in the milk and nutrition portfolio, as well as management comments on demand trends, will also be key. Nestlé’s strong brand recall and market positioning are among its major strengths. The under-penetrated packaged foods market in India offers an attractive long-term growth opportunity. However, investors should watch for sustained improvement in its financial performance.