BackNestlé: Maggi noodles done, what else is on the menu?
Now that Maggi noodles are back on the shelves, investors would like to see Nestl turn more aggressive and gun for growth
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In the June and September quarters, Nestlé India Ltd’s management and its investors were focused on the resolution of the ban on Maggi noodles. Now that they are back in the market, the attention is likely to shift to other parts of the business. There is still the matter of the suit filed by the government in the National Consumer Disputes Redressal Commission, and the government’s decision to appeal the striking down of the ban by the Bombay high court. These will play out in due course.
The re-introduction of the noodles should see sales growth recover. Initially, the contribution to profitability can be expected to be low, as it may have to invest more on advertising and promotions, and even spend on incentivizing its network of suppliers who have incurred losses in this period. A better picture should become available after a few quarters.
At a recent analyst meet, Nestlé provided updates on the noodles relaunch and also on other parts of its business. It has set a target to return to double digit growth for the overall business, which is good news for shareholders. Although it has not set a time-frame, investors would be happy even to see a movement in that direction.
Analyst reports on the meet indicate that the company is keen on driving up volume growth where possible and not be hung up on high margins. Its strategy of holding on to prices even when demand was dull and commodity prices were declining had affected volume growth even before the ban on Maggi noodles. A Nomura Research report notes that in infant nutrition, margins, and not volume growth, are a priority. But it will drive volume growth in categories such as instant noodles, coffee and chocolates.
This will not be an easy task as it is facing slowing growth in its categories compared with the overall food and beverages (F&B) market. Overall F&B growth improved to 12.2% in the first nine months of 2015, from 8.5% in the same period a year ago. But the categories where Nestlé is present saw growth slip to 8.1% from 8.8%. Of course, the decline in the instant noodles’ category in this period could have played a major part in this slowdown.
Nestlé’s share has recovered from the fall after the noodles’ episode, as investors became confident of its ability to return to the market. That hope has been justified. Now, they would like to see a company that had turned defensive, even before the Maggi episode unfolded, turn more aggressive and gun for growth. Nothing less than that can justify the high valuations its shares trade at.
The writer does not own shares in the above-mentioned companies.
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