Nestle shares have fallen and fallen really bad. On Wednesday they tumbled another 9 per cent on worries of ban in Delhi and several big supermarkets pulling the Maggie noodles off the shelf. On Thursday they are down another 5 per cent.
The Delhi government imposed a 15-day ban for higher than permitted led contents. Problems in Kerala and UP already persist and other states are investigating the matter.
The shares have fallen from Rs 7160 on May 28 to the current price of Rs 5839. Should you buy the Nestle India shares that have now fallen a good 20 per cent in the last few days.
Here are some things to consider.
1) Reports say that the Maggi brand accounts for around 20 per cent of the sales of the product. While this is yet to be confirmed, this is certainly not an insignificant number. The image of the brand may have been tarnished and even if the lead compliance is adhered to, it could still play on the minds of consumers who wish to buy the brand even after compliance.
2) The stock is already priced heavily in terms of price to book value and price to earnings multiple. This is always the case for foreign multinationals into the FMCG business or the packaged food business. The price to book value of the company is already in excess of 21 times, which is very steep. The price to earnings ratio is around 47 times, despite the sharp fall in the share price.
One does not find a comparable multinational stock to do comparisons with.
3) The good quality stocks tend to bounce back after temporary jolts and one would not be surprised if the stock bounces back after the episode dies down. How soon that will take is anybody's guess.
4) The state of Goa has said that the samples that it tested were safe to eat. If many more states feel the same, you might see a solid rally in the stock of Nestle India.
5) The best thing to do would be to buy the stock if you get it around the Rs 5000 levels. This would mean another 15-20 per cent lower from the current levels. This would imply a price to earnings ratio of 38 times.
6) Remember, Cadbury India managed to recover its volumes after a few years following worm trouble it had in some chocolates. It imported foreign machinery for packaging and also engaged heavily in a brand building exercise, which took a lot of time.
So, do not go ahead and chase the Nestle stock at this level. Wait for it to come to a level that you seek and once the matter dies down, the stock could bounce back again. Nobody today remembers the worm episode in the Cadbury chocolates any longer.