Moneycontrol Bureau
Shares of Nestle India climbed 6 percent intraday on Thursday riding high on Bombay High Court ruling. The Court has set aside Food Safety and Standards Authority of India’s (FSSAI) order banning Nestle India’s popular brand Maggi instant noodles. The court has ruled that samples will now have to be tested in three different labs located in Jaipur, Mohali and Hyderabad in six weeks and are not allowed to manufacture or sell Maggi till testing is completed. So, is it party time for Nestle stock?
Even though the popular noodle brand may return to shelf soon, Nestle India spearheaded by new MD Suresh Narayanan will have to toil hard bringing back the goodwill dousing safety concerns. A lot has to be spent on advertising and promotions (A&P) drive to regain consumer trust which may hurt margins in the near-term.
Nestle India had posted a net loss of Rs 64.4 crore in April-June quarter from a profit of Rs 287.9 crore from year-ago period. The company incurred an one-time loss of Rs 451.7 crore due to stocks withdrawn which also included incidental costs. During the quarter, total income was down 19.5 percent at Rs 1957 crore against Rs 2432 crore (Y-o-Y).
Net sales in the quarter decreased largely due to impact of Maggi noodles issue. Its net sales worth Rs 288.4 crore was reversed in Q1 due to withdrawal of Maggi noodles from market.
After its Q2 earnings, Bank of America Merrill Lynch had reiterated underperform rating on the stock stating that 'despite correction, stock valuations are still demand high decadal growth and reflect tall expectations'. The brokerage, though, said supply of Maggi noodles may re-start by the end of 2015 it warned that adverse outcome from pending litigations provides downside risks. "Short-term gross margin gains can be offset by negative operating leverage pending resumption of Maggi noodle sales," it said.
JP Morgan also stays neutral on Nestle India as it states that regaining consumer confidence and timing of the re-launch of noodles will be critical catalysts for the earnings growth and valuation outlook.
However, Narayanan said in an interview to CNBC-TV18 (on Aug 3) that his first mandate was to bring Maggi noodles back in the market and the company would work overtime to make sure it meets customers' expectations on quality.
Narayanan had also said that Nestle would look to revamp its product strategy: it is likely to look at changing the product mix for Maggi noodles once it is brought back as well as intensify its push into other segments such as nutrition and drinks.
Meanwhile, the Swiss giant is also facing a Rs 640-crore class action suit. The consumer affairs ministry had flied a case before the consumer forum NCDRC seeking Rs 284.45 crore in basic damages and another Rs 355.50 crore in punitive damages totalling Rs 639.95 crore. In the petition, the ministry said it is in the process of "tabulating further damages" and will seek additional damages when further facts and data emerges.
At 12:41 hrs Nestle India was quoting at Rs 6,430.00, up Rs 245.30, or 3.97 percent on the BSE.Follow @NasrinzStory
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