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    Decoded – How Maggi episode helped Investors make money ?

    By

    August 21, 2015

    Who could have thought that India’s most loved noodles would suffer such ignominy? A lot has been said and done to the innocent white strings of Maggi. The blot on the delicious noodles, however, left a bitter aftertaste for its parent – Nestle.

    And no, do not move over to another site just yet! This is not another piece for or against the actions taken. Here, it is strictly financial.

    One of the memes depicting the Maggi debacle

    Nestle episode is another instance of how sticking to fundamentals of a Company can help one make a sweet decision in the capital markets. No quick rich schemes, no misleading tips. Cold, hard logics are most important to judge a Company, and to an extension the value of its stock.

    The fall and recovery –

    When the Maggi debacle came to fore, Nestle stock (500790) fell 20% (from 7088 to 5539) in just 6 trading sessions.

    But, it managed to touch 6800 on August 5, in less than 2 months, like a champ.

    Movement of Nestle on BSE validates the adage “Buy good Companies cheap”

    So what made this recovery possible? After all, Maggi is big for Nestle. It accounted for Rs 2,500 crores, a quarter of Nestle India’s sales in 2014. A question mark on the future of such significant income source could have led to absurd negative valuations for its stock.

    The cause for this resistance lies in the underlying value that Nestle has built globally. And this brand is not made up on gas, it has a solid foundation beneath. This is why the sudden shock to the stock turned out to be an investor delight!

    Judge yourself.

    How do you value a business?

    Weighing it mainly on the following factors –

    1) Financial health – Past performance, Present earnings, Future prospects

    2) Company’s reputation and Goodwill

    3) Market share and Mind share (a term coined by the Oracle of Omaha, essentially referring to the image of the Company in the mind of the consumer)

    4)Innovation and Research

    5) Adherence to acceptable societal norms

    And when we talk of Nestle, you might go on to check all the above, won’t you?

    1) Financials –

    1. Operating margin at 21% with Net Profit margin at handsome 12%
    2. Return on Capital employed and Return on Net Worth at 63% and 42% respectively
    3. Debt Equity and Interest coverage Ratio at 0.01 and 125.80 times respectively
    4. Earnings per share at Rs 122.87 and Book value per share at Rs 294.27.

    However, at current PE of 66 as compared to industry PE of 50, it seems to be a bit overstretched. (But, don’t forget, this is all due to the exceptionally dull Q1 results)

    The conclusion is the Company is on a strong footing. With almost no debt on its books and superior shareholder returns, it has the power to leverage its position in the market, and absorb external shocks comfortably.

    (All figures, except PE Ratio, are on figures as on year ended 2014- Nestle follows CY as FY)

    2) Goodwill –

    When it is said that Nestle is one of the most reputed brands in the world, most would agree. With brands like Maggi, Everyday, Nescafe, Milo, Kitkat, Eclairs and Alpino under its wings, the Company has been an FMCG major in the world for too long.

    Its tagline “Good Food, Good Life” though may seem ironic at the moment, has stood the test of time for the last 15 decades.

    Nestle Brands

    3) Market share and Mind share –

    Maggi is known to enjoy more than 70% of the organised noodles market domestically, with Yippee noodle a distant second at 18%. As far as the mind share goes, you too might miss hearing “Maggi, Maggi, Maggi” on your TV screens. It is behemoth of prepared dishes industry in India.

    4) Innovation and Research –

    Nestle pledges to invest heavily in India, both in terms of setting up research facilities for better quality products to spreading awareness for need of good nutrition. Bringing in the best practises, and global standards domestically, the Company seems to be committed to the India story.

    5) Acceptable societal norms –

    It essentially means the quality of management and their approach towards carrying on the business. Fair, conducive but aggressive is how experts term Nestle’s business approach. There are none significant litigations against the organisation (except for the recent one) and no charges of unethical business practise. The Company seems to believe in doing things the right way.

    All the above, make me say that the fault is not in the Company, rather it is gem. But still, markets have become a place which at times (or mostly) behave irrationally. The stocks get plummeted to the floor in panic and are taken to unjustified valuations on rumours of any upside potential.

    Good stocks are aplenty, and with India projected to move on the upside, so are the opportunities – both in stocks and businesses.

     

    Views presented in the article are those of the author and not of ED.

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