Before we get into debate of why we will still not buy Nestle India let us look at its 9 months results and how this business had faired.

The total income from operations had fallen down by 15%, EBITA had fallen down by 19% and net profits by 56% compare to last year. The culprit for such poor performance goes to Maggi noodles and so far it had cost them 476 crore losses and it is still going on.

So far the shareholders had seen the performance of its share price going down by just 5% from the 1st Jan 15 and looks like they will also not get their dividends this financial year (last year they paid dividends of Rs 607 crore excluding dividend tax which represents 50% of its profit).

We always had said that businesses are static in nature and these kind of incidents (Black Swan) do occur and it should not impact your long term view if you are one of the 76,714 shareholder of this business, unless if you had bought them around Rs 7,500 (which was 52 week high and today it is trading 20% down).

We always mention to buy a good quality stocks and we still believe that Nestle India is a good quality (A1 quality as of Dec 2014 financial results) business and looking at the results so far we think its quality shine may fade to A2 which is still an investment quality business.

But there are few trends that are raising our eyebrows, to start with, we are seeing a trend of return on equity falling down. In the year 2011 they reported 90% ROE, 2012 70% as their ROE, 2013 54% as their return on equity, 2014 as 46% and we are expecting its ROE for the current year below 20%. This clearly gives us a notion that they are losing their competitive edge to their competitors and it is always very hard to change this trend unless you introduce something new in your product portfolio which your competitors don’t have so far or will take while to add that in their portfolio.

A good business is the one who generates a lot of cash profits for its shareholders and this is one of the quality we always look for when we are looking to invest in any business. Nestle India does have that quality and this is one of the reason that they still have ‘A’ quality even though they are having a disaster financial year so far. They have burnt their cash reserves but mostly that money has gone out to clear their debts which three years back were sitting around Rs 1,200 crore.

On a value perspective we think it is trading at a very premium price and we are of belief that price always follows the intrinsic value of the underlying asset and assets of Nestle India will be reporting first time in ten years it ROE below 20%.

Most of the brokerage businesses and analyst expects its 2016 earnings in range of Rs 145 – 155 and if we put those numbers in formula then we are still not expecting its ROE climbing above 38%. We think market today is pricing this business on its 2018 earnings.

We think buying at these levels is dangerous as there is a good probability of stock price to fall then to climb. We also think it is going to be very tough for the managers of these business to improve its ROE and keep it above 40% consistently.

Your thoughts are mot welcomed.

Aziz Dodhiya is the chief investment officer for the Valueoperations fund.