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Edelweiss downgrades Nestle India to ‘reduce’ on Maggi muddle

Edelweiss, one of India’s biggest brokers, has downgraded Nestle India to ‘reduce’ from ‘hold’ over the controversy surrounding one of its biggest revenue drivers – Maggi noodles. Some state governments have alleged that the noodles contain lead and high levels of MSG, which the company denies.

Sales of Maggi noodles are expected to have halved over the reports.

“We cut CY15E and CY16E EPS 18.2% and 19.5% YoY, respectively, and expect the stock to de-rate, further aggravated by an anticipated deficient monsoon. Hence, we downgrade to ‘REDUCE’,” it said.

Reduce is the lowest of the three ratings, with ‘buy’ indicating a positive stance, ‘hold’ indicating an inline performance and reduce indicating chances of price decline in the future.

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“The Maggi issue and the widespread counter measures taken by state governments have raised concerns over the growth path. The Maggi brand has taken a hit as sales are down 40‐50% post the news. Moreover, Kerala has banned sales of Maggi and lead was found in samples tested in Delhi, which has raised the specter of a
possible ban there as well,” it said.

Edelweiss said its survey of consumers, wholesalers and retailers revealed there has been a sharp drop in the off take of the product after this news.

There have been news articles claiming that sales of Maggi have dipped 40% in some departmental stores in India.

Meanwhile, Nestle has claimed that its noodles are safe to eat, Edelweiss noted.

“We have in place strict food safety and quality controls at our Maggi factories, including through quality check at each stage of our raw material sourcing and manufacturing process,” the company said.

“We have submitted samples of Maggi Noodles from almost 600 product batches to an external laboratory for independent analysis and we tested samples from almost 1000 batches at our accredited laboratory. These samples represent around 125mn packets.”

“All the results of these internal and external tests show that lead levels are well within the limits specified by food regulations and that Maggi noodles are safe to eat.”

The controversy could lead to some marketshare gains for direct competitors like ITC in the short term, said Edelweiss.

“We believe in the short term there is a possibility of market share gain for companies selling instant noodles, resulting from consumers shifting from Nestle’s Maggi to other instant noodles brands. ITC is expected to be a key beneficiary from this shift with its brand Yippee Noodles, which has gained market share from Nestle and also has a strong distribution network.

“However, over the medium to long term, the Nestle issue will heighten the scrutiny of other food companies as well, which may bring up new issues,” it added.

Other companies selling instant noodles are HUL (Knorr)and Top Ramen noodles from Nissin.

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