Stop eating 'Maggi'! But don't stop owning it... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Stop eating 'Maggi'! But don't stop owning it... 

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In this issue:
» How has Sensex performed in the Modi regime so far?
» Has Modi government showed signs of cronyism?
» A round up on markets
» ...and more!


00:00
Having been brought up in a health-conscious family, I was always discouraged to have processed junk food. But you know how stubborn kids can be... Especially, after a tiring day at school the only thing that could quickly satiate my hunger and taste buds would be 'Maggi' noodles. On most occasions, my mom would simply not allow me. She would offer me 'dhoklas' and 'theplas' instead. But once in a while, she would give in to my whims, and I would indulge to my heart's content. Of course, I had to then endure hour-long sermons on the merits of eating healthy home cooked food. But that was alright. As a kid, these things didn't mean so much to me. But now when I have my own kid, I am able to empathize with my mother more than ever before.

Well, personal stories apart, I thought of sharing my two cents on the recent controversy surrounding Maggi - Nestle's instant noodle brand - that came as quite a shocker.

From what I have been reading, I gather that high levels of monosodium glutamate (MSG) and lead content were found in some of the Maggi samples tested by Uttar Pradesh Food safety and Drug Administration (UP FDA). Both these items are known to have detrimental effects on health. As per The Times of India, LFSDA has initiated an inquiry and written to the Food Safety and Standards Authority of India (FSSAI) in New Delhi seeking cancellation of Maggi's licence.

In its response, Nestle India maintained that it does not use MSG in manufacturing any of its products. Apparently, the company also said in a statement that it was surprised to know about the high lead content in the food samples.

There are two key perspectives that I want to present on this issue.

First, wearing the hat of a consumer and a responsible parent...

In matters of health and safety, even a potential hazard must be avoided. So whether Maggi is found guilty or not, whether Maggi is banned or not, I am certainly not going to eat the instant noodle again. And I will make sure my child does not eat it as well. In fact, one must try and avoid processed junk food in general. Well, this is only my personal view. Not everybody thinks that having stuff like Maggi once in a while is so bad. You see, big names and fancy packaging does not make your food safe. My mom's traditional wisdom gets vindicated hands down.

Now, wearing the hat of an investor...

Should investors of Nestle India worry about the recent controversy and dump the stock? I don't think so. Let me explain.

Nestle's Maggi is a very big brand that has ruled the instant food market for decades. Of course, there may be temporary setbacks and the company may have to go into overdrive to protect its image. Competitors like ITC will try to make the best of this controversy and to grab market share from Nestle. But the long term impact of this controversy would be very limited.

Given its immensely strong brand equity, market penetration across the length and breadth of India and financial muscle it has the essential ingredients to deal with such shocks, take corrective actions and resurrect its brand image.

Apparently, Maggi is not the only super brand that has come under the regulatory scanner for poor food safety.

Do you remember back in 2003, Cadbury was mired in a similar controversy after there were reports that said worms were found in Cadbury's most popular chocolate brand Dairy Milk? Did anyone stop eating Dairy Milk after that episode? No. After the fiasco, Cadbury invested heavily into product quality and better packaging. To revamp its brand image that may have been tarnished by the controversy, it roped in Amitabh Bachchan as its brand ambassador. Rest all is history. Cadbury continues to retain its leadership position in the Indian chocolate market.

Many other big brands including McDonald's, Coca Cola, Pepsi, KFC, Heinz have been engulfed by various controversies around the globe on issues pertaining to food safety, hygiene, contamination and health side-effects. In the end, these junk food giants have prevailed.

In Berkshire Hathaway's recent annual shareholder meeting, Charlie Munger defended his love for junk food businesses.

It turns out that consumption pattern of individuals are sticky. Hence, even if product quality suffers in the interim but is associated with a strong brand, the good image in mind of individuals remains intact. In the end, it all boils down to investing in wide moat companies. Bigger the brand, wider the moat...

So, if you or your children have been eating junk food like Maggi noodles, I would reiterate my mom's advice to you. But if you are a shareholder of Nestle India, there is no reason for you to panic.

Do you think the recent controversy relating to reports of high MSG and lead content in Maggi noodles could severely impact the future prospects of Nestle's instant food business? Let us know your comments or share your views in the Equitymaster Club.

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02:45  Chart of the day
Let us shift our focus from brand & brand equity to government & government performance. The Modi government completed its first anniversary recently. With all the euphoria that was created during elections expectation was sky high. However, the view so far on performance is split amongst masses. While some say that new government is anti-farmer and has just indulged in sloganeering one quarter of India Inc is happy with the initiatives that are taken to revive growth. This is more of a sentimental evaluation. But when it comes to assessing the performance on quantitative basis stock markets are apt benchmarks since they are a barometer of the economy.

As seen in today's chart the one year performance of Indian stock markets under the Modi regime has been dismal with returns of just 6%.

Sensex returns lag under the Modi regime
Phil $=Philippines
.
However, poor returns should be seen in the context that markets had already priced in huge expectations from the new government well in advance. And that euphoria has been frittered away recently as Modi premium is slowly fizzling out. While it is too early to judge the performance of any government in one year, markets made up their mind over it. Also, India's underperformance has got a lot to do with foreign institutional investors (FIIs) pulling out money of late as they were significantly overweight on India. This portfolio rebalancing exercise has led to a correction in markets.

While the one year returns have lagged so far it would be interesting to see how the performance will be after Modi government completes its first term in 2019.

Hope you have had a chance to listen to Vivek Kaul's analysis of the government's performance in the past year.

03:55
While the one year returns under Modi regime have just been 6%, since markets started pricing in the victory from January 2014 many argue it would make sense to gauge return performance since then. And since Jan 2014, the Sensex has returned a massive 32%!

While such outperformance is certainly noteworthy it may give an opportunity to Modi critics to hurl the cronyism bow at him. Mind you the opposition continues to label the government as crony with utter disregard for farmers. But what is the truth? Is the government really ignorant towards the needs of poor and is business centric?

Well, there is no sure way to know this, certain steps taken by the new government show that it is keen to display it does not favour industrial groups at the cost of common man. Take the case of Reliance Industries for example where increasing gas price has been a contentious issue for long. Though the Rangarajan committee's formula yielded a figure of US$8.4 per unit the Modi government is allowing only US$5-5.5 per unit to be charged putting RIL at a disadvantage. This is not a one of case. Modi's strategy to distance himself from the Adani's Australian coal block project loan imbroglio with SBI is another example indicating that the government does not want to fall into corporate lobbying. Even the general sentiment is that influence from New Delhi cannot be bought anymore.

While this does not mean that Modi government is pious and incorruptible, it is taking steps to project itself as being indifferent to corporates and common man. We reckon this is the best strategy to survive in politics as you are dependent on former for funding and latter for votes! Apart from sloganeering and marketing, diplomacy is another thing at which the new government is certainly good at.

04:30
The Indian stock markets were trading in the red at the time of writing. While the BSE Sensex was down by 274 points , NSE-Nifty was down by 74 points. The Asian markets were trading in the green at the time of writing. However, European stock markets opened in red today.

04:50  Today's investing mantra
"Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like." - Warren Buffett
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This edition of The 5 Minute WrapUp is authored by Jinesh Joshi and Ankit Shah.

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7 Responses to "Stop eating 'Maggi'! But don't stop owning it..."

MITESH J SHAH

Jun 3, 2015

After having known that Maggi has such deadly contents , i dont think a very responsible team of EM sud have touched this subject . Infact we should think ethically & avoid such comments " Stop eating 'Maggi'! But don't stop owning it.." , bcoz i think personally that if the same thing would have happened in US then this company would be thrown out of business & hence shareholders wealth wud have eroded equally fast the way it had made its image as a SUPER BRANDED product.
Its wrong to make profits out of bad health from such products even though the profits may amount to billions to any shareholder like me or if rightly said no shareholder would like to make hefty profits after having known abt this product.
Ethically made profits are far better for ones own satisfaction then such irrational thinking just for the sake of doing so.
i know the company so involved may come out of the solution soon rather then stoping the production of the said deadly product which is target to young & infant INDIAN population.WOULD THE ANALYST SAY THE SAME IF THEY WERE TO BE IN USA ? THINK AGAIN

Like (1)

Sarat Palat

May 27, 2015

As a common man we don't know he truth and fact behind this. We have to wait and watch. I am of the opinion that these sort of things is not going to affect the reputation of Nestle in anyway.

Like (1)

Savio

May 26, 2015

I am with Jinesh on this. As an analyst he has to lay the facts on the table in terms of investment value (not ethics).

It is then up to folks to decide to buy Nestle based on ethics and their value systems, as much as they would, based on their risk appetite (or the lack of it) for such a stock.

I know of non-smokers invested in ITC and VST Industries because they taste their financial numbers and not their cigarettes. :)

If Equitymaster were to analyze stocks based on ethics alone, then all junk food companies, alcohol/cigarette companies, energy companies (environment impact), and so on, would be out of bounds.

Like (2)

Dharmendra Kapur

May 25, 2015

The agency which has found MSG and Lead is Uttar Pradesh Food safety and Drug Administration (UP FDA). Knowing the way the various departments in UP function, I can only accept this with a lot of salt and not just a pinch. The state's administration has done an absolute awesome job with the Ganga cleaning plan (pun intented). I for one do not believe a word of this. Has something happened between the UP government and Nestle which we do not know about?

Like (2)

Anil

May 25, 2015

If Maggi is making unhealthy food, it is morally and ethically wrong of you to pump the stock. You cannot justify investing in a company that is potentially poisoning its customers so they and you can make a profit.

Like (2)

Anand

May 25, 2015

Hi Jinesh, I do not agree with your view that what is not good for your physical health may still be good for your financial health. That smacks of double standards to me. I for one do not invest in cigarette company stocks even though they may be doing very well financially. I do not think it is good to make money by spoiling someone else's health. After all, if you have personal ethics, they should reflect in your financial decisions too. Remember Amitabh Bachchan stopped advertising for soft drinks when he found that they have many harmful things in them and Sachin Tendulkar has steadily refused to feature in ads of alcohol companies. Making money without ethics has no purpose. So, I will urge you to think twice before writing such articles.

Like (2)

paresh shah

May 25, 2015

Well you certainly are not a proponent of Ethical Investing. !! LOL !

Like (1)
  
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