Nestle India's Q3 results show normal course of business

04 Nov 2016 | By Ramya

Nestle India Limited's Q3 2016 results indicated that things are back on track after the Maggi noodles recall incident.

Its operating profit margin decreased a bit on a sequential basis; the net profit jumped 17% to Rs.269 crore compared to Q2 earnings.

Kotak Institutional Equities Research's analysts said at least for the ex-Maggi portfolio, the earnings should be considered "normal course of business."

In context: Nestle India's comeback post Maggi ban

IntroductionAbout the Maggi noodles ban

In May'15, Food Safety Regulators from Uttar Pradesh found Maggi noodles samples had high levels of monosodium glutamate, and nearly 17 times the permissible limit of lead.

In Jun'15, New Delhi, Gujarat, Assam, Tamil Nadu, Andhra Pradesh, the FSSAI, and the Centre banned Maggi foods.

In Aug'15, Maggi sample tests found no dangerous lead levels; the nationwide ban was struck down by Bombay HC.

CostHow much did the ban cost Nestle India?

After FSSAI had banned Maggi foods, Nestle India recalled stocks worth nearly Rs.320 crore from across India.

The company paid Ambuja Cements Rs.20 crore to burn the entire stock at its Chandrapur cement plant.

The Ministry of Corporate Affairs imposed a nearly Rs.640 crore fine on Nestle India.

In Q2 2015, the company had reportedly posted its first net loss in nearly 30 years.

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04 Nov 2016Nestle India's Q3 results show normal course of business

The ex-Maggi domestic portfolio

PerformanceThe ex-Maggi domestic portfolio

The Maggi noodles issue made a year-on-year comparison challenging to evaluate Nestle India's performance.

Kotak analysts said assuming Rs.500cr-worth Maggi sales in Sep'16 quarter and Rs.650cr-worth sales in Sep'14 quarter, the ex-Maggi domestic portfolio appears to have declined 3% compared to the Sep'14 quarter.

Kotak analysts stated comparing earnings two years ago would be more apt given the Maggi issue last year.

Kotak Institutional Equities Research's statement

"One can change the assumptions on Maggi sales and arrive at a conclusion that ex-Maggi sales have done better than what our math suggests; however, that would mean that Maggi revival pace is slower. Either way, it is not a pretty picture."

SalesThe Sep'15 quarter, the worst for Nestle India

Since the Maggi episode, the Sep'15 quarter proved to be the worst for Nestle India; the net domestic sales decreased to Rs.1,588cr.

For the Sep'16 quarter, net domestic sales increased 38% to Rs.2,190cr.

The operating revenue jumped 35.6% to Rs.2,363cr; domestic sales rose 5% in Sep'16 quarter, on a sequential basis.

Domestic sales declined 2% during the Jun'15 quarter compared to the Mar'16 quarter.

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New products launch

Hopes that Nestle India's sales would gain traction after the resolution if the Maggi noodles issue have buoyed sentiments, launch of 25 new products or variants across several categories in recent months are some of the factors which helped in quick revival.

Q3 2016Satisfactory sales growth, yet to be achieved

In Q3 2016, the net profit increased 17% to 269cr; the net profit is being considered satisfactory but, enough sales growth is yet to be achieved.

Nestle India investors, however, have little to complain as the share price appreciated 17% in 2016, so far.

The stock trades currently at 57 times estimated earnings for 2016; faster sales growth would help in sustaining the valuation.