Nestle India's Stock Faces Overvaluation Risks Amid Baby Food Controversy

The share price of Nestle (NS:NEST) India has recently remained in the limelight for the wrong reason. As per reports by the International Baby Food Action Network (IBFAN), Nestle India’s baby food products contain high levels of added sugar, especially in India when the same products in other developed nations such as the United Kingdom, Germany, etc. are sold without any added sugar.

On the back of the development, investors fear scrutiny by the government which could lead to some strict actions against the company. This fear is reflected in the share price of Nestle India which fell 3.2% yesterday on the NSE and despite a positive market today, the stock was down 1%.

As per Morgan Stanley (NYSE:MS), If Nestle can broaden its portfolio and expand its no-sugar offerings, it may minimize the negative impact. It has assigned a higher weight to the bear case to reflect the risks to margins with the company's higher rural focus, taking a few assumptions into consideration.

There are a few risks that should not be ignored such as the sharp macroeconomic slowdown affecting growth in the packaged food industry, infant nutrition in particular and a sharp rise in input prices.

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On the valuation front, the stock is significantly overvalued. The easiest way to determine the correct valuation is to take the help of InvestingPro’s fair value feature which analyzes a stock by various financial models and takes a mean of all intrinsic values to arrive at a more realistic valuation number.

In the case of Nestle India, the fair value is INR 1,934.2, which is 20.4% lower than the CMP of INR 2,430. But that’s not all, if you look at the highest valuation among all models, even that is of INR 2,188 per share, which is also lower than the CMP. And such valuations are prior to any potential scrutiny the government might initiate which could lead to some loss in revenue from the baby-food segment.

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ProTips also suggests that the stock is overvalued as per P/B, revenue, EBITDA and EBIT multiple valuations which should not be ignored. No doubt it is a good stock as the financial score of 3 out of 5 is what we need minimum for any quality stock and Nestle India has the same score of 3. But because the valuations are stretched, investors might be better off waiting for some dip.

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