Nestle gains on buzz of Ching’s joining its noodle basket, analysts warn of ‘expensive deal’

The addition of the iconic Ching’s brand to Maggi-maker Nestle India’s basket will be a further boost to its market leadership, believe analysts but some have valuation concerns.

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Nestle India shares gained almost 3 percent on March 31 afternoon following a report that parent Nestle SA is among the final bidders for Capital Foods Pvt Ltd, which owns the famous Ching’s Secret brand.

At 1.15 pm, the stock was quoting at Rs 19,610 on the National Stock Exchange, up 2.92 percent from the previous close. Nestle SA holds 34.28 percent stake in Nestle India and Maggi Enterprises Ltd 28.48 percent. The rest is held by public shareholders

Any transaction would likely value the Indian firm at more than $1 billion, news agency Bloomberg said in the report.

As per reports, Capital Foods is set to clock in Rs 800 crore in revenue for FY23, so the analysts Moneycontrol spoke to believe the deal would be expensive at a 10x EV/Sales ratio.

That said, the addition of Ching’s brand to Nestle India’s basket will further boost its market leadership.

“Nestle is already No.1 in instant noodles category. The acquisition of Ching’s will consolidate its position even more,” Kaustubh Pawaskar of Sharekhan by BNP Paribas said.

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Capital Foods’ topline growth has also been strong. From Rs 145 crore in FY13, when Kishore Biyani exited the company, revenue has compounded over 18 percent over the last ten years.

“The potential acquisition would be expansion for Nestle India in noodles, cooking paste and masala mixes category,” ICICI Direct said in a note.

But, there’s a catch…

If the deal goes through, investors need to monitor whether Nestle SA acquires it via Nestle India or parks it under itself and chooses to charge royalty from the Indian arm for using Capital Foods’ brands.

Nestle India pays 4.5 percent of its total turnover to Nestle SA as royalty. The street verdict is that royalty fees eat into the earnings available to shareholders and only benefit the parent.

But Nestle India chairman and managing director Suresh Narayanan said in the Q4 earnings concall, “We are not simply gifting away money to the parent. It is for operational support and manufacturing capabilities.”

CY22 annual report

Nestle India marked its strongest growth in a decade, with domestic sales rising 14.8 percent YoY in 2022. Exports also grew by 8.2 percent YoY with a focus on the Indian portfolio, as per the company’s annual report. However, the operating profit margin contracted 200 basis points to 20 percent, on the back of high-cost raw materials.

Double-digit growth came across categories with the confectionary segment growing by 25 percent, along with market share gains by Kitkat and Munch. Beverages grew by 19.2 percent and prepared dishes and cooking aids, which includes the Maggi brand, grew 15.6 percent.

“With normalcy fast returning, out-of-home consumption, robust e-commerce growth and the company’s widening rural reach, we believe Nestle to play a strong game in the FMCG industry,” Abneesh Roy of Nuvama Institutional Equities wrote in a note.

He has a target price of Rs 23,435 on the stock.

On the other hand, analysts at Motilal Oswal Financial Services believe valuations at 54.4x CY24E P/E are expensive and do not offer any significant upside from a one-year perspective. They have a target of Rs 19,900 on the stock with a “neutral” rating.