The ban on Maggi has seen Nestle India sell off dramatically in a short span (in the last one month, it is down 17%). How much correction is enough? Many investors wonder if the stock has bottomed out and whether this chaos is a buying opportunity.
The Maggi ban (annual sales of R2,000 crore) has eroded Nestle’s market value by about R11,800 crore, implying an EV/sales of c6x (against the FMCG sector multiple of 4.7x, Nestle at c6x before this development) for Maggi Noodles. Even if one were to assume Maggi is highly profitable and a faster growing category within the Nestle portfolio, it implies Maggi now is a real option with almost zero current value in the Nestle portfolio.
But it is also reasonable to assume that part of the true value has been permanently impaired. Hence, each incremental news flow, whether positive or negative, will continue to influence the value of this real option.
We expect that in CY16, the company is likely to raise its media spending significantly, to regain consumer trust, which, in turn, may lead to only modest earnings next year as well. Previous experiences tell that it may take at least a year or even longer for consumer trust to come back fully.
We estimate that Nestle sales will dip in the rest of CY15 and may lead to flattish top line growth for the year.
Overall, we estimate that, in CY15, clean PAT may decline c11% y-o-y while reported PAT may be about c31% down y-o-y due to a one-time inventory write-down. In CY16, we estimate a clean PAT growth of c14%. As a result, we lower our estimates, cutting the target price to R6,500 and retaining a ‘hold’ rating.