am I missing something or Is this just FII selliing ?

Value pickr has been source of good information for business analysis for last 1/2 years.Thanks Valuepickr Team and all their members for your time.I always liked contrasting views being posted which helps to look at your thesis of investing in closer detail. Since, I have been passive reader for so long, I thought I should give back. I mostly like picking stocks which kind of fits multidisciplinary analysis and have many forces working for that.So, I will share analysis brief of current Maggi fiasco and hope you have fun reading it.

Mental Models, Maggi?

History:-

Cadbury
Cadbury faced similar situation in Oct 2003, where consumers found worms in the chocolate causing major uproar in media. The sales plummeted by 30% for the quater considering the festive season where it used to witness a 15% increase. Cadbury upgraded manufacturing facility and put stricter rules for food packaging. The Brand name again revamped using project “Vishwas” and sales bounced back.

Intel
The Division bug in Intel chips caused loss of ~0.5B. Intel used new branding strategy.The famous Intel song, Intel inside logo and charisma of Andy Groove rebounded the trust in the Intel products.

Pepsi
Wide protest for high content of pesticide in Pepsi. The sales fall but it came back with ads which rebounded the trust in Pepsi.

Learnings:- Major brands facing uncertain situation bounced back.

Psychology:-

Social Proof :– Many State government banned the product even though their test was negative in contents of lead and MSG.

Hind sight bias:- People forgot the incident of Cadbury and Pepsi and they will as well forgot the incident of Maggi.

Denial Syndrome:- Maggi taste will cause strong denial syndrome in consumers and they will come back to buy it once trust is restored.

Philosophy:-

1.The company which is doing good for 40 – 50 years and due to uncertain circumstances faces a problem does not mean the company is bad.

2.Nestle as a whole derives only 25% sales from Maggi so the worst case scenario, it will lose 25% sales due to lose of brand.

3.Nestle as a whole faced some situation like this in other countries and where able to deal with it.

Finance:-

1.The Cash balance will help to deal with this uncertain situation.

2.The debt levels are low to cause any bankruptcy.

Competitive advantage:-

Demand side advantage
1.Habit/Search cost:- Maggi is synonymous for noddles.

2.Economics of Scale:- Due to high market share it is able to lower the fixed cost per product.

3.Switching Cost:- The Pavlovian effect will cause people to come back for same product.

Supply side advantage
1.Patent/Process:- The Masala for noodles is trade mark secret .

Price/Value:-
1.The stock price fall by 20% after the incident came to light which corresponded to 14K Cr decrease in market cap.But, Nestle derives only 2000Cr so in worst case the market cap should fall by 2000 Cr if we think in sales terms which clearly indicates market overreaction to the situation under the assumption if the market is efficient at the price what nestle was selling before the incident.

@pratyushmittal @ayushmit Just noticed that data in screener (Balance sheet,Borrowings,Cash flows) for Years 2011 and later and not matching with moneycontrol/Annual report

One more innovative step:-

The Waterbase Ltd, a leading manufacturer of high quality shrimp feed, has launched ‘Bay White Enriched’, a new generation shrimp feed formulated with essential nutrients required for producing healthy shrimps.

Bay White Enriched is a mixture of highly digestible marine and vegetable proteins matching the ideal protein specification for the Vannamei shrimp. The product contains natural sources of phospholipids, cholesterol and omega-3 fatty acids to fulfil the shrimp’s requirements for essential lipids.

Given the growth in shrimp exports which accounted for 67 per cent of the marine export revenues, good farming practices coupled with availability of quality seed and feed would help the industry to increase shrimp production.

The company’s major focus is to develop shrimp feeds that are high on nutrition and are anti-biotic free, Ramakanth V Akula, CEO, The Waterbase Ltd, said in a release.

Bay White Enriched is available in all the Waterbase dealer outlets across the country.

Using the formula: (1 – g/ROCE)/(WACC – g) from Valuation by McKinsey (page 66), I tried to find out a reasonable PE for Ajanta. Results are displayed in table below. Seems a lot depends on long term growth rate which the market is currently implying at 16% (PE of 32)

WACC picked up from http://www.gurufocus.com/term/wacc/NSE:AJANTPHARM/Weighted%2BAverage%2BCost%2BOf%2BCapital%2B%2528WACC%2529/Ajanta%2BPharma%2BLtd

Disclosure: Invested. Forms a significant part of portfolio