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Nestlé’s Q3 results show Maggi recall impact far higher than estimates

 In the September quarter, Nestlé reported a 32.1% year-on-year drop in revenue and a 47.4% drop in operating profit. Photo: Bloomberg

In the September quarter, Nestlé reported a 32.1% year-on-year drop in revenue and a 47.4% drop in operating profit. Photo: Bloomberg

The results for the September quarter of Nestlé India Ltd show the Maggi recall has left the company far more battered than most analysts had thought. Operating profit nearly halved, which means the impact on profit is over Rs.1,000 crore on an annualized basis. Nestlé India had reported an operating profit of Rs.2,130 crore in 2014.

In the September quarter, the company reported a 32.1% year-on-year drop in revenue and a 47.4% drop in operating profit. In comparison, analysts at the top five institutional brokerage firms had estimated a far lower 16.9% drop in revenue and a 20% drop in operating profit. Here’s the nub: sales of Nestlé India’s other products are also declining.

Sales of milk products, infant foods, chocolates and beverages have declined approximately 9% year-on-year, Mint’s calculations show. Most analysts had expected sales of these other product categories to grow between 8% and 12% from year-ago levels. The calculations are based on the assumption that Maggi noodles accounted for a quarter of revenues in last year’s September quarter, in line with its contribution for the full year. The company told analysts at the end of July that sales of Maggi noodles amounted to Rs.2,500 crore, or around a fourth of its 2014 revenues.

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Investors should worry. Revenues and operating profit are 18% and 34%, respectively, lower than average estimates of analysts at Kotak Institutional Equities, Bank of America Merrill Lynch, Barclays, Deutsche Bank and Nomura. But as one analyst at an institutional brokerage firm points out, like its other multinational counterparts, Nestlé India shares are “Teflon-coated”, and it remains to be seen if investors will react to the sharper-than-expected fall in profit.

To be sure, ever since the Maggi controversy started, Nestlé India’s shares have underperformed the broad markets by only about 9%. Shares of multinational consumer goods firms enjoy rich valuations in India, presumably because of their generous dividends and steady growth. But valuations are out of whack. Colgate-Palmolive (India) Ltd and Hindustan Unilever Ltd trade at around 40 times estimated earnings for the year till March 2016. Nestlé India gets an even higher valuation of over 50 times estimated earnings. With estimates now set to be cut, its shares should fall sharply when trading resumes on Friday.

But then, sanguine investors may take comfort in the fact that Maggi sales are expected to resume soon and things may not continue to be as bad as they were last quarter. They should worry, however, about the drop in sales of other categories, and the sharp fall in profits. Some of the decline may be on account of some price cuts the company took in some categories such as milk in the last quarter. But if the FSSAI (Food Safety and Standards Authority of India) misadventure with Maggi noodles is leading to trust issues in other product categories, then Nestlé India may have an even bigger problem than what the September results convey. Investors can only hope this is not true.

The writer does not own shares in the above-mentioned companies.

[“source -livemint”]

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