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Buy or sell: How to trade Maggi-less Nestle India?

Bank of America Merrill Lynch reiterates underperform rating on the stock with a target of Rs 5200 per share and slashed estimates by 4-5 percent. It states that despite correction, stock valuations still demand high decadal growth and reflect tall expectations.

July 30, 2015 / 04:04 PM IST
 
 
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Moneycontrol Bureau

After Maggi noddles hurt Nestle India in April-June quarter, analysts continue to be cautious as lower-than-expected cost impact of Maggi noodles ban may spell in more trouble for it. However, the stock has not reacted negatively in Thursday trade.

Bank of America Merrill Lynch reiterates underperform rating on the stock with a target of Rs 5200 per share and slashed estimates by 4-5 percent. It states that despite correction, stock valuations still demand high decadal growth and reflect tall expectations. The brokerage, though, feels supply of Maggi noodles may re-start by the end of 2015 it warns that adverse outcome from pending litigations provides downside risks. The new MD Suresh Narayanan stated that the company is making all efforts to bring noodles (25 percent of revenue) back on the shelves soon.

"Also a possible advertising and promotions (A&P) initiative, for regaining consumer trust, can hurt margins in the near term. We also expect higher regulatory scrutiny in future: a risk not fully factored in the stock price. Possibility of frivolous litigations and related news-flow add to this risk," BoAML says in a note.

Credit Suisse maintains neutral rating as it feels non-Maggi business of Nestle is likely grew at low single digits this quarter. It has reduced 2015 earnings estimates by 40 percent to account for exceptional costs related to the stock take-back of Maggi noodles in CY15. Also, other products were also impacted, as the sales team was engaged mainly in the take-back activity. The key trigger for the stock, says Credit Suisse, will be the new MD aggressively pursuing growth.

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. "We adjust our CY15E/16E earnings for the disruption in revenue on account of Maggi, now building in a recovery starting in CY16 only," it adds.

Nestle India has posted a net loss of Rs 64.4 crore in Q2 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 includes incidental costs. During the quarter, total income was down 19.5 percent at Rs 1957 crore against Rs 2432 crore (Y-o-Y). The company says net sales worth Rs 288.4 crore was reversed in Q1 due to withdrawal of Maggi noodles from market. "Net sales decreased largely due to impact of Maggi noodles issue. Net domestic sales fell by 20.6 percent. Export sales declined 12.7 percent impacted by lower coffee exports to Russia partially offset by export of milk and nutrition products to Bangalesh.

At 10:54 hrs Nestle India was quoting at Rs 6,156.80, up Rs 9.50, or 0.15 percent on the BSE.

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