Nestle India’s flagship brand Maggi 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. 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% y-o-y, respectively, and expect the stock to de-rate, aggravated by an anticipated deficient monsoon. Hence, we downgrade to ‘reduce’.
We expect Maggi’s volumes to come under pressure in coming quarters. 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. Also, during this phase, the brand may lose market share to rivals (ITC’s Yippee noodles).
Nestle’s volumes will come under pressure due to the negative brand perception on Maggi. Moreover, the issue could impact the company’s other offerings as well. With the stock at 45.8x CY16 P/E, we downgrade the stock to ‘reduce’ from ‘hold’ with a revised target price of R5,641.