Hold Nestle India; target of Rs 6039: ICICIdirect

ICICIdirect.com's report on Nestle India

Nestlé India (NIL) is currently in the middle of testing times as Maggi instant noodles (72% market share by volume and 74% by value), the flagship brand and major revenue driver of the company (~30% of its net sales), is in the midst of a controversy as various Food Safety and Drug Administration (FSDA) authorities in several states in India have impugned the fitness of this food product for human consumption. It all began when NIL received orders from the Uttar Pradesh FSDA to recall a batch of 2 lakh packets of Maggi noodles manufactured in February 2014 from the market on account of presence of excess levels of taste enhancer monosodium glutamate (MSG) and high levels of lead content in samples beyond the permissible limits stated by food authorities.

"We believe the recent events have dented the brand image of Maggi while the company has to step up its A&P spend significantly to neutralise the impact of this controversy. We have a cautious view on the stock as we expect volume growth to remain under pressure in CY15E (volume growth at 0.7% CAGR in CY11-14). We cut our target price on the stock to Rs 6039 per share (45x its CY16E earnings) and maintain our HOLD rating on the stock", says ICICIdirect.com research report.

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