Nestle India has posted impressive net profit for the December quarter but the Europe horsemeat fiasco could affect its Indian operations or the brand image could take a beating. Not surprisingly, the fiasco found no mention in the Edelweiss’ analyst report

Nestle India has performed decently for the December 2012 quarter. According to a report by Edelweiss, net sales grew 10% year-on-year (y-o-y) while profit after tax (PAT) grew at an impressive 20.8% y-o-y to Rs278.90 crore. Edelweiss, however, has rated the company as a HOLD (i.e. it expects the scrip to appreciate up to 15% in the next one year) and believes its value is Rs5,050 per share, but at the same time tagged it as a “Sector Performer” (i.e. it expects Nestle India’s returns to match the overall consumer goods sector in the next 12 months). The results were aided by prudent cost management, higher sales and superior product mix and decline in tax rate.
 

A Moneylife analysis showed that Nestle India has been performing steadily despite difficult times. Its net sales growth for the December quarter (10%) is on par with its three quarter y-o-y average growth rates of 10%. Its operating profit is better, which grew at 28% y-o-y when compared to the three quarter average of 19%. Its return on networth is astoundingly high at 84% which speaks volumes of its brand image and fundamentals. This is why its valuation is at a premium, with its market capitalisation over 20 times its operating profit. But there’s more to this that most Indian investors are probably not aware of.
 

While the results were good, what is surprising is that there is no mention of the horsemeat fiasco in the Edelweiss analyst report. Nestle has been in the news, in Europe, for all the wrong reasons. Apparently, it was discovered that two of its pasta products, in Italy and Spain, contained traces of horsemeat. The latest debacle that has been raging much of Europe that horsemeat has been found in packaged foods, originated from Britain and Ireland. While it may not concern Nestle’s products sold in India (or the Indian subsidiary for that matter), the fact that it concerns the overall Nestle brand image and management, which has taken a big hit now. Indian retail investors ought to be informed this much at least. It has already removed the pasta products from the shelves in Italy and Spain, after DNA tests confirmed traces of horsemeat. It is quite possible that this fiasco is in the minds of the consumers and it may affect Nestle’s demand in general. This isn’t the first time Nestle has been embroiled in controversy. Earlier, Nestle’s milk product had melamine in Chinese-made milk and infants had died because of it.
 

Going forward, according to the Edelweiss report, Nestle plans to launch oats under the Maggi brand as a ‘healthy’ extension of its noodle segment. Consumers, however, should be aware of health effects of noodle and soup products which are not really ‘healthy’. We had written in detail over here: Shocking! All instant noodle brands are fooling you on nutrition, health
 

Some of the highlights of the quarter were the inauguration of its R&D centre in India at Manesar, Harayana. The report said, “This shows increased commitment to India by Nestle SA and the company’s confidence in tapping the India market’s humungous consumer base.” Nestle also acquired 26% stake in Agro and Allied Activities, a milk collection business in western India.
 

Edelweiss remains optimistic on Nestle despite tagging it a HOLD. The report said, “Nestle remains the best play in the packaged food category in India. We expect new product launches to drive consumer enthusiasm and sustain growth momentum.” It will be interesting how Nestle’s global management handles the crisis.
 

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