Nestle India’s Q2CY15 sales and PAT came in much below our estimates, impacted by the ban imposed on Maggi noodles by FSSAI.
Nestle India’s Q2CY15 sales and PAT came in much below our estimates, impacted by the ban imposed on Maggi noodles by FSSAI. Net domestic sales declined 20.6% y-o-y to Rs 1,780 crore (netted of Rs 290 crore of sales return of Maggi from the trade) as Maggi was taken off the shelves, effective June 5, 2015. Export sales disappointed and fell 12.7% y-o-y, hit by lower coffee exports to Russia. Reported Ebit (ex CSR) fell ~24% y-o-y to Rs 320 crore marred by lower operating leverage, but overstated to some extent as Nestle booked cost of production relating to destroyed Maggi inventory in exception in accordance with AS-2 and AS-5. Loss stood at Rs 6,440 crore as Nestle recognised exceptional item of R45,166 crore relating to loss of inventory and incidental costs. We believe that appointment of the new Indian MD was the right step taken to help revive the Maggi brand. We expect Nestle to to recoup brand equity of Maggi gradually once the approval comes in. Maintain ‘reduce’.
Nestle India’s growth will remain under pressure until Maggi noodles is out of the mess. Margins will also remain under pressure due to lower operating leverage. The matter is currently pending with the Bombay High Court. At current market price, the stock is trading at 84.9x CY15e and 44.8x CY16e. We maintain ‘reduce/sector underpeform’ with a revised target price of Rs 5,213 from Rs 5,641 earlier.