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5 ways Maggi controversy affects Nestle
Nestle India, the Swiss-based consumer goods company's India arm, is making headlines these days. Its famous two-minute noodle brand, Maggi, is in the eye of a controversy. It all began when the UP Food and Drug Administration found some samples to be unsafe for consumption. The samples were found to have more lead and Monosodium glutamate (MSG) than the prescribed limits. The controversy snowballed since then with 11 states across India imposing an indefinite ban on the popular instant noodles. Goa became the latest state to ban Maggi. Not surprisingly, investors panicked and sold the stock. Its share price fell nearly 13.5% or by Rs 941 in the fifteen days to June 10, 2015.
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Fall in the sales:
As states across the country banned the product, many retailers took Maggi off the shelves. Future Group, which owns the supermarket chain Big Bazaar, was one of the first to stop selling the noodles packs. Some states such as Punjab, Karnataka and Uttarakhand also ordered Nestle to stop production until further orders. As a result, Maggi sales fell 60% across India since the controversy began in the last week of May, according to a Kotak Securities report.
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Nestle revenue dented:
The fall in sales directly affects the revenues of the consumer company since Maggi is a big revenue generator for Nestle India. It is the single largest brand under Nestle India, which usually contributes about 22-25% to its total revenue of the company, the Kotak report said. The fiasco has forced Nestle to cut production by one-third. It also began recalling Maggi from markets across India. Consequently, many analysts feel that Nestle may lose about Rs 160 crore in revenue in the quarter to June 2015. This is also expected to affect Nestle's overall profits. Maggi contributed 30% of Nestle India's Rs 1,185 crore-worth profits in 2014-15, as per the media reports.
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Consumer confidence slumps:
Trust plays a major factor when a consumer buys a particular product. With harmful chemicals like lead and MSG found in samples across the country, consumers may feel their health is at stake. This has shaken consumers' confidence. Nestle's public relations strategy also failed to take consumers into confidence, points out Kotak Securities. Even consumer grievances on social media were managed only with a standard automated response, which did not impress its loyal consumers. The company voluntarily recalled Maggi after calling its consumers 'confused', according to media reports. This further damaged the reputation of the company, the Kotak report said. Ironically, Maggi was adjudged the most powerful brand in India in 2014.
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Financials to take a beat:
Ultimately, the controversy over Maggi's safety is likely to impact Nestle's financial prospects as the demand has grown at a slow pace in the past quarters. Most consumer goods companies have seen single-digit growth in the recent past. Keeping this in mind, the current controversy is only expected to add to Nestle's woes. Revenue growth may weaken in this financial year in the aftermath of the controversy, Kotak said.
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What does it mean for the investors?
The Nestle India stock currently trades at 33 times the company's future Earnings per Share (EPS), according to Kotak Institutional Equities report. This means, investors pay 33 times more than the company's expected profit in FY16 to purchase the stock. Importantly, the future EPS was calculated by considering 55% growth in profit per share between 2014 and 2016. This is not valid any more. Experts forsee EPS to be hit by 10-20% by the fall in Maggi sales, the Kotak Institutional Equities report states. This means, the stock is even more costly - trading at 37-40 times Nestle's FY16 EPS.
Here are five ways the controversy affects Nestle India, the multinational company, which owns this brand:
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#70
Maggi controls nearly 70% of the instant noodles market in India, worth Rs 5000 crore, according to a report by Times of India. It is followed by ITC‘s Sunfeast Yipee, which has a market share of 18-20%. Hindustan Unilever's Knorr Soupy noodles makes up for the balance share.
