BoAML reiterates underperform on Nestle, Q1 net seen up 15%

Impact due to Maggi withdrawal and lost sales in the rest of the portfolio because of partial instability in the supply chain are worrying BoA ML. Dragged by these concerns, the brokerage expects Q1 sales and net profit to grow 1 percent and 15 percent annually.

July 07, 2015 / 12:04 IST

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Bank of America Merill Lynch has maintained underperform rating on Nestle as its finds valuations quite expensive. The brokerage has also slashed target price to Rs 5,400 per share. While the stock has corrected 18 percent from recent peak, valuations still demand high decadal growth despite multiple earnings misses, and reflect high expectations, BoA ML feels. It has also reduced CY 15 earnings per share (EPS) by 10 percent.

Impact due to Maggi withdrawal and lost sales in the rest of the portfolio because of partial instability in the supply chain are worrying BoA ML. Dragged by these concerns, the brokerage expects Q1 sales and net profit to grow 1 percent and 15 percent annually.

“The withdrawal of Maggi from the market can cost Rs 160 crore (pre tax) for destroying about 30,000 tons of the noodles. In the past three weeks there seems to be a spillover from this withdrawal to other product lines given constraints on warehousing and sales bandwidth: this can hurt near term. We also expect higher regulatory scrutiny in future, a risk not factored in the stock price historically. Possibility of frivolous litigations and related news-flow add to this risk,” it says in a report.

At 11:46 hrs Nestle India was quoting at Rs 6,145.00, up Rs 28.00, or 0.46 percent on the BSE.