Will Nestle too disappoint Street after likely entry into Nifty?

ET Intelligence Group: The stock of Nestle India hit a record high on the speculation of being included in the Nifty 50 index in its next reshuffle. However, short-term investors may well book profit in the stock if such an inclusion stands confirmed.

This is because two out of every three companies that have made it to the Nifty in the past five years have posted negative returns in the year after inclusion. As many as 19 out of the 21 stocks underperformed after a year of inclusion against their performance a year before, indicating that the Nifty inclusion comes at the time of peak performance. It is also indicative that much of the positive sentiment surrounding the inclusion gets factored in well before the actual inclusion.

For instance, the Britannia stock was included in the Nifty in March this year. The stock is down 18 per cent since, whereas it had gained 20 per cent in the year before the inclusion. Similarly, JSW Steel, which got added in October 2018, is down 44 per cent till now. It had posted 52 per cent gains in the year preceding its inclusion.


Only two – Eicher Motors and Bajaj Finserv – of the 21 stocks that got included in the Nifty in the past five years performed better a year after their inclusion in the benchmark index. Trading at very high valuation of 71 times of its trailing four quarter earnings, the Nestle stock will be the most expensive FMCG stock in the index, if included.

Nestle India reported an exceptional performance in the latest quarter to June, posting 10.5 per cent growth in volume amid overall slowdown in demand.

While acknowledging the slowdown, the management has hinted of single-digit growth this year. The company posted a smart recovery since FY16 when its flagship noodle brand Maggi got embroiled in controversy concerning its quality. The company has institutional holding of 20 per cent. Its return on net worth stands at 45 per cent and return on capital employed at 43 per cent. The company is relaunching its global malt-based drink Milo in India.