Thursday, June 4, 2015

Maggi In A Soup??? WTF

So Maggi has been in the news for excessive chemicals in food. Don't people know that. Pepsi and Coke have carbolic acid and aspetim [in diet versions] that are harmful???? [Note that I am a heavy consumer of Diet Pepsi n Coke Zero] Cigarettes are injurious to health - I find it stupid that US and Canada courts are awarding billions of dollars as fines to tobacco companies for "not warning adequately risks of tobacco consumption" People are well aware of what they are getting into [as mature adults. Nevertheless, I can speak only for myself and I am fully aware of risks when I pick up that puff or that peg. And most people are - it is a choice made]

Anyways coming back to Maggi - let us face it folks. It is an FMCG product that follows the conventional supply chain as of now. Factory to Regional Distribution Centre, Regional Distributor to Super Stockist, Super Stockist to Stockist and Stockist to Point of Sale. Business means every time a product or service changes hands, there is a margin to be paid. Conventional FMCG business works on the following premise [Average and Ballpark Figures]

Point of Sale - Margin = 10%
Stockist - Margin = 8%
Super Stockist - Margin = 6%

So for a product that costs 10 rupees, 2.4 have to be kept aside for margins for these players
Another 2 rupees have to be kept aside for trucking, warehousing and wastages
So from an MRP of 10 bucks almost half is already shaved off as expenses and these are all operating expenses. Then comes the aggressive marketing campaigns and salaries to be paid to staff. What is left is just about 3 bucks to produce [mostly contract manufacturing]

So is there any scope to have "healthy" ingredients??? "Healthy Food" means well controlled procurement of "good ingredients" that come at a price. That is why the meal at Taj or Sheraton costs that high. If you want a pack of noodles for 10-15 bucks, there is bound to be artificial chemicals in the product. [Because the company has to manufacture within the 3-5 rupees price band]

Note that I am not justifying Nestle or Maggi. The point I am trying to drive is that as far as the common man is concerned, s/he is well aware that if you pay peanuts, you get monkeys. This is universally applicable to staff, products and services.

When we go to the street corner to savor that bhelpuri, samosa, wada pav, chole kulche, we are well aware that quality will be a challenge. We attribute that to unorganized food sector and make our choice.

Just because Maggi belongs to a brand like Nestle, it is creating news. Even that is fine but then one needs to also evaluate Yippees, Chingles, Feasters [Private Label of Aditya Birla Group], Knorr et al. Take any of these brands and the odds of them failing quality tests are as high as Maggi. Right now, my personal contention is that since the issue has cropped up, why single out Nestle alone. Subject ITC, HUL, Aditya Birla, MTR, GITS all for food safety standards. Since this issue has cropped up, let there be a fair evaluation of the entire sample space.

We have had agitations with regards to pesticides in soft drinks, genetically modification in KFC. It will be in the news for sometime [till media keeps trumpeting it on prime time] and then fade away.

This is a daily chart of Nestle from 2013. Look at the volume bars.Whenever Nestle has traded on extra-ordinary volumes, yes prices collapse in the short term [3 to 6 months] and then resume their upward march. Currently, we have not yet reached the volumes that existed in 2013-2014

Normal Trading Volume on Nestle 80k to 100k shares

26th Nov '13 - Volume = 750k with spot price around 5000 bucks a share

28th Feb '14 - Volume = 850k with spot price around 4800 bucks a share

By 10th March 2015, Nestle stock was trading at 7500 clocking a 50% gain in 18 months.

Yesterday's fall volume was about 400k shares. So there is some more downside pending as the volumes need to hit 750k to 800k shares. Technically, the critical buying levels are 5800, 5400 and 5000 levels. Of course the rally of 2014 had a sentiment effect with the new government and the next rally will not be that fast. However, just like the soft drinks and pesticide news, KFC and chicken news, this MSG and Lead stuff will be behind us soon.

The stock will eventually reclaim old highs and perhaps attain newer highs of 10k levels. Since timing the market is next to impossible, this is a very good time to start an SIP on Nestle as the stock is poised to deliver 30% CAGR returns over the next 36 months.

Stock has breached 200 DMA with conviction and historically when Nestle breaks 200 DMA with volume and momentum, it tends to spend about 6 months below that 200 DMA mark.

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