Reduce Nestle India; target of Rs 5641: Edelweiss

Edelweiss' report on Nestle India

Nestle India’s (Nestle) flagship brand Maggi has landed in a soup. It has come under the scanner of many state regulators for excessive lead and MSG content. As per our channel checks, post the brouhaha, Maggi sales have nosedived. Further, while Kerala has banned its sale, Delhi is mulling action due to negative test reports (samples contained lead). The prepared dishes segment (of which Maggi Noodles forms bulk) contributes ~30% to Nestle’s revenue. We cut CY15E and CY16E EPS 18.2% and 19.5% YoY, respectively, and expect the stock to de-rate, further aggravated by an anticipated deficient monsoon. Hence, we downgrade to ‘REDUCE’."

"The prepared dishes segment has been the fastest growing segment for Nestle over the past few years. We expect Maggi’s volumes to come under pressure in coming quarters. As per news channels, the Future Group has stopped Maggi sales in its stores. In a bid to revive the brand, the company will have to invest heavily to communicate that its products are safe (similar to what Cadbury did in 2003). Legal costs/promotions will also inch up, which will take a toll on margin."

"Nestle’s volumes will come under pressure due to the negative brand perception on Maggi. Moreover, apart from the brand, the issue could impact the company’s other offerings as well. With the stock at 45.8x CY16 P/E, we downgrade recommendation/rating to ‘REDUCE/SU’ from ‘HOLD/SP’ with a revised target price of INR5,641", says Edelweiss research report.

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