Nestle India's nightmare not over but 'turnaround MD' Suresh Narayanan raises hope

It is official. The controversies surrounding Maggi noodles and its eventual recall have had a debilitating impact on Nestle India. The company’s sales during the quarter declined 20 percent and posted a net loss for the first time in 15 years.

“This quarter has been extremely challenging for the company. Nestle India would like to reassure consumers that our products are safe. Consumer trust is and will always remain the cornerstone of Nestle. Nestle India is making all efforts and will continue to engage with authorities to bring Maggi Noodles back on the shelves,” media reports quoted Nestle India Managing Director (designate) Suresh Narayanan as saying in a statement.

For those who have not checked out the figures, here it is. The company’s net loss during the quarter stood at Rs 64.4 crore. This compares with a profit of Rs 288 crore a year earlier.

Net sales fell 20.1 percent on year to Rs 1,933.8 crore. Its total income from operations during the period under review declined 19.52 percent to Rs 1,957.01 crore as against Rs 2,431.97 crore in the same period of previous year.

According to a report in the Mint newspaper, during the quarter the company recalled about 30,000 tonnes of Maggi from the market, which resulted in a sales reversal of Rs 288.4 crore.

Shares of the company traded 0.1 percent lower at 12:35 pm. The reason for the subdued reaction to the poor earnings could be that investors have already discounted the crisis which unfolded in May.

Hence the impact on the earnings is very much evident because Maggi was the company’s most visible product in the market in India. Looking at the way earnings were imapcted by the controversies, one could even wonder whether the company was surviving on a single product. That precisely seems to be the major flaw in the company’s business strategy for India.

According to Harminder Sahni, founder and MD, Wazir Advisors, quoted in a report in The Times of India, the company, though has been profitable, was not aggressive in India.

“They banked on one product, that is, Maggi, too much. Since, their rivals in the category couldn’t do much, they thought they were invincible,” he has been quoted as saying in the report.

Brokerage Edelweiss notes that Nestle sold 2,24,000 tonnes of Maggi in calendar year 2015 worth Rs 2,500 crore, accounting for one‐fourth of its total sales.

Some analysts even believe the numbers are just the tip of the iceberg. Sunita Sachdev, an analyst with UBS Securities, has told the Mint that the result “does not reflect the real picture” because adjustments are based on assumptions, and other expenses may be inflated. She expects to get the real picture in the next quarter.

Edelweiss has termed this quarter as a nightmare quarter for the company. It says the Maggi controversy had a rub-off effect on other brands of the company as well.

The brokerage has attributed the 20.6 percent decline in net domestic sales to the Maggi recall. Export sales fell 12.7 percent on year due to lower coffee exports to Russia.

“Nestle’s growth will remain under pressure until Maggi is out of the mess. Margins will also remain under pressure due to lower operating leverage,” it said.

All eyes on new MD

Analysts are now pinning their hopes on the new MD Suresh Narayanan. According to Edelweiss, he is known as the ’turnaround MD’ and is credited with swinging into profit the company’s operations at Singapore and Egypt during his tenure there. In the concall after the earnings, he has reassured that Maggi is safe and the company is trying to bring it back soon into the markets.

Another brokerage firm Kim Eng Securities had earlier said the appointment of Narayanan was a positive development for Nestle India. “An Indian origin managing director will be able to understand and manage the issue related to Maggi instant noodles ban in India,” it said.

It expects that the new MD will be able to manage the government authorities, suppliers and distributors in a more effective manner compared with his predecessor.

It also notes that it is the first time in 17 years that an Indian will be heading the Swiss company in India.

However, it is a long haul for the company, cites a domestic brokerage firm. Kotak Institutional Equities assumes that Maggi noodles sales may resume by September 2015 and the company will return to pre-crisis level monthly sales run-rate only in the second half of calendar year 2016.

“Nestle has a tough task ahead as it has been silent, slow and has mounted a legal challenge against the regulator’s move,” Abneesh Roy, associate director at Edelweiss Securities, has been quoted as saying in the ToI report.