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The baby food sugar controversy – A concern for Nestle

* Nestle’s baby food products, particularly Cerelac and Nido, have been found to contain elevated levels of added sugar and honey, especially in low- and middle-income countries, as outlined in a report by a Swiss investigative organization, Public Eye. This practice deviates from international health guidelines, especially those established by the World Health Organization (WHO) to curb obesity and related health issues (News link).

* The report reveals that Cerelac variants in India consistently contain added sugar, averaging nearly 3 grams per serving, which is in stark contrast to the sugar-free versions available in Europe. This discrepancy has raised concerns over potential health implications, especially for infants and young children, as the WHO advises against the inclusion of added sugar in baby foods due to their association with childhood obesity.

* Public Eye, in collaboration with the International Baby Food Action Network (IBFAN), conducted tests on various Nestle products, including popular brands such as Nido and Cerelac, across lower-income countries. These tests confirmed the presence of added sugar, primarily in the form of sucrose or honey, in products intended for infants and toddlers.

* Importantly, the report underscores the irregular practices carried out by Nestle, where products marketed in developed nations are notably sugarfree, while those sold in low- and middle-income regions contain added sugars. For instance, Cerelac baby cereal in South Africa was found to have significant sugar content per serving, whereas the same product in Switzerland explicitly states no added sugar.

* Nestlé India, addressing these concerns, has stated its commitment to the ongoing product reformulation aimed at sugar reduction. Over the past five years, they have already achieved upto 30% reduction in sugar content.

* In CY22, Nestlé India's sales from its milk products and nutrition portfolio (encompassing dairy whitener, condensed milk, yogurt, maternal and infant formula, baby foods, and healthcare nutrition), comprised ~41% of the company's total sales.

Valuation and view

* We see no material impact of this controversy on the company.

* The company remained focused on volume-driven revenue growth. The planned capex of INR50b for 2023-25 reflects this focus. The packaged food category is likely to sustain better growth among staples.

* The stock trades at expensive valuations of 69x/61x P/E of FY25E/FY26E. Reiterate Neutral with a TP of INR2,400 (based on 60x Mar’26E P/E).

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