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Last Modified: Fri, Oct 30 2015. 07 36 AM IST

Nestls Q3 results show Maggi recall

impact far higher than estimates
The results for the September quarter of Nestl 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 overRs.1,000 crore on an annualized basis. Nestl 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.
Heres the nub: sales of Nestl Indias other products are also declining.
Sales of milk products, infant foods, chocolates and beverages have declined approximately
9% year-on-year,Mints 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 years
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 toRs.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, Nestl India shares are Tefloncoated, 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, Nestl Indias 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. Nestl 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 Nestl India may have an even bigger problem than what the September results convey.
Investors can only hope this is not true.

Nestl India slips into loss after Maggi

noodle ban
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Nestl India, the local division of the Swiss consumer foods company, slipped into a
loss for its second quarter after being battered by a national ban on its popular Maggi
noodles due to safety concerns.
In a statement to the Bombay Stock Exchange on Wednesday, Nestl India reported
a net loss of Rs644m ($10m) in the three months ending in June, compared with a
Rs2.8bn profit during the same period last year.
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The company said sales had dropped 20 per cent year on year because of the
Maggi noodle scandal, which erupted last month when Indian food regulators said
they had found dangerously high levels of lead in several samples. They said the
noodles were unsafe and hazardous for human consumption.
Nestl, which has disputed the test results and insists its noodles are safe, was
ordered by the Food Safety and Standards Authority of India to suspend all sales of
Maggi noodles one of the most popular products in its Indian portfolio with a near
cult following among young, time-pressed Indians.
Nestl was also ordered to recall and destroy all existing Maggi noodle stocks a
massive logistical exercise involving about 350m packets of noodles that the
company has estimated cost it Rs4.5bn during the quarter.
Etienne Benet stepped down as the companys managing director last week, paving
the way for Indian-born Nestl veteran Suresh Narayanan to take charge and steer
the effort to return Maggi noodles to shelves. The product dominated the market with
70 per cent of instant noodle sales.
This quarter has been extremely challenging for the company, Mr Narayanan.
Nestl India is making all efforts and will continue to engage with authorities to bring
Maggi noodles back on the shelves.
Nestl has petitioned the Mumbai High Court in a challenge to the national ban, and
oral arguments are expected to conclude on Thursday.
Doubts over the reliability of the Indian governments test results and the
necessity of the ban have been fuelled by the findings of food safety watchdogs in
developed countries including Singapore, the UK, Canada, Australia and New
Zealand that the noodles posed no threat to human health.
Since the crisis erupted in India, food safety authorities in all these countries have
tested made-in-India Maggi noodle samples, found that the lead levels were below
permissible limits, and allowed their sale to continue.