Maggi Controversy Wipes Out Nearly Rs 10,000 Crore From Nestle's Market Cap in 5 Trading Sessions

Maggi Controversy Wipes Out Nearly Rs 10,000 Crore From Nestle's Market Cap in 5 Trading Sessions

The controversy around Maggi noodles, under scrutiny for high content of lead and mono-sodium glutamate or MSG (a taste enhancer), has led to a sharp correction in Nestle India shares. Four states - Delhi, Gujarat, J&K and Uttarakhand - have banned Maggi for varying periods; many others have announced tests of Maggi noodles.

Since May 28, Nestle shares are down nearly 15 per cent from Rs 7,038.65 to Rs 6,010.80. The selloff has wiped out nearly Rs 10,000 crore from Nestle's market capitalization.

On Thursday, Nestle shares dropped below Rs 6,000 for the first time since December 2014.

Maggi is a big revenue generator for Nestle India, which reported a net profit of Rs 1,185 crore on sales of Rs 9,800 crore in 2014 calendar year. Maggi contributes around 22-25 per cent to Nestle's topline and 30 per cent to the company's profitability, according to Kotak Institutional Equities.

A number of brokerages have started downgrading the stock.

Barclays, which has a "underweight" call on Nestle, on Thursday cut the target price on Nestle shares from Rs 5,593 to Rs 5,149 citing high valuations.

ICICI Direct, which has a "hold" rating on Nestle, cut its target price by 12.5 per cent to Rs 6,039. The brokerage expects sales from prepared dishes segment to take a beating in the next few quarters; Nestle will have to increase its advertising and promotional spend significantly to neutralize the impact of this controversy, it added.

"Nestle's brand equity has taken a hit in the wake of this controversy as Maggi noodles are largely considered a staple snack for children," ICICI Direct said.

Interesting, Maggi was adjudged the most powerful brand in India by WPP Milward Brown, according to Nestle's 2014 annual report.

Kotak Institutional Equities also cut its target price on Nestle from Rs 6,200 to Rs 5,800. The brokerage has a "reduce" rating in the stock.

"We believe this event should make investors question the 'quality premium' attached to the company... A slip-up on safety aspects (if true) and poor PR management of the event raise valid questions on the premium," Kotak said.

Phillip Capital downgraded Nestle to "sell" with a target price of Rs 5,110. "If the allegations prove to be true, Nestle will face a hefty penalty, complete erosion of brand value, and considerable loss of market share in instant noodles," it said.

Most analysts that NDTV spoke to advised investors to stay away from Nestle shares as long as the controversy does not settle down. Some like Rohit Srivastava of Sharekhan said the controversy gives long-term investors a chance to buy premium shares like Nestle.

"These are short-term issues. You bet on the ability of Nestle to resolve the issue," he added.

Nestle, which has maintained that its tests show Maggi noodles is "safe to eat", also found some support on Twitter from the investor community.