Sugar in baby food not the only issue that is troubling Nestle: Abneesh Roy

Abneesh Roy, Executive Director, Nuvama Institutional Equities, says: “We do not see any significant impact of the sugar in baby food issue on the sales of Nestle's products in India because the company has reduced sugar content in the last five years by 30% in Indian products. My sense is they will keep doing that. Indian paediatricians are saying that below two years, there should not be any added sugars. I expect that Nestle will keep on doing the local R&D to reduce this further. “

Was the sell-off in Nestle on Thursday justified?
Abneesh Roy: There are three things to consider. One is the sell-off today; we do not see that necessarily coming out because of Wednesday’s development of extra sugar found in baby food. I would say that in the last few weeks, back-to-back, there have been some negative news flows in Nestle. First, there was the news of cocoa cost increasing – almost 200-300% in the last one year and doubling in the last few months.


Second, the cost of coffee has been inflationary. Nestle margin expansion in the near term is looking a bit challenging because of coffee and cocoa cost being high. But yes, milk cost is down and that should be addressed partly.

Third, there was a royalty increase. A 15 bps royalty hike every year for the next five years and over five years, a 75 bps increase. Coming back to this sugar news, we do not see any significant impact on the sales of Nestle's products here because of three reasons. One is of course Nestle has reduced the sugar content in the last five years by 30% in the Indian products.

My sense is they will keep doing that. So, the added sugar content has to go down, especially if you see Indian paediatricians saying that below two years, there should not be any added sugars. I expect that Nestle will keep on doing the local R&D to reduce this further.

Second, in India, most food products have added sugar. So, I would say in developing countries because of the pricing challenge versus developed countries where that issue is not there, there is added sugar in most food products. As we transition towards tougher regulations and per capita income improves, gradually that journey will happen.

I do not see that near term any big regulatory risk is there because this is not something like lead. This is sugar which is there in most of the food products that we consume. But yes, we will have to hear from Nestle's local R&D team. So, net-net, we do not see this as a big concern on the numbers. But yes, back-to-back three negative news flow have happened in the last few weeks and that is why the stock is correcting. In the food space, we will prefer Tata Consumer and even Britannia from one-year perspective is looking decent versus Nestle where currently these two-three issues are there.

What is a good price to buy Nestle? I distinctly remember when the whole Maggi issue happened a couple of years ago, those who bought when Nestle fell, were rewarded.
Abneesh Roy: So, two things. One, this is nowhere comparable to Nestle Maggi issue. In the Nestle Maggi issue, it was lead, etc, and the regulators banned the product. There were many quarters where the product had faced issues of supply. Here, there is nothing like that. This is sugar. We all consume sugar. So, I do not think the two things can be compared.

Second is the Nestle stock has not really corrected too much. On Thursday, it was down 4%. But from the peak levels and in the last one-year, the three-year performance of Nestle stock has been very good in the broader FMCG where it has been out of flavour with the investors a bit. Of course, there have been stocks like Tata Consumer, Varun Beverages, etc, which have done really well in the same space. The Nestle stock has also done well.

You have to see that this 4% correction and maybe 10% correction from the top is not very big to warrant immediate interest from the investors. My sense is in the next one or two quarters, some more time correction can happen, as investors understand the cocoa cost, the higher royalty cost, those things howthey pan out. But from a near-term perspective, Nestle's sales and EBITDA growth will still be decent. But my sense is depreciation cost for Nestle could go a bit higher because they are commissioning new factories also and that is one more concern that depreciation cost will be on the higher side in the coming quarter.