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Henkel: Hoping for a 'Brisk' year

Jan 1, 2003

A 51% subsidiary of Henkel AG, the Euro 12.8 bn German MNC, Henkel Spic India, is in the business of manufacturing eco-friendly detergents (zeolite based). Tamilnadu Petroproducts also has a 17% stake in the company. Its key brands are Henko, Brisk (detergents), Limeshot, Pril (cleaning solutions), Fa range of personal care products, Margo, Aramusk (toilet soaps) and Neem (oral care). Let's take a look at the company's strengths and prospects. In FY03, the company could not replicate its strong FY02 performance. Henkel's topline as well as bottomline hardly showed any growth during the year. The overall downturn in the Indian FMCG sector as well as the competitive environment was largely responsible for this. Also, the company's interest outgo proved to be a bane. Despite this, the company's return on capital employed (ROCE) continues to improve (from 4.2--% in FY01 to 8.4% in FY03). In FY03, Henkel continued with its strategy of expanding its product range. It has recently added to the Fa range personal products for men too.

(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Gross Sales 917 979 6.8% 2,539 2,600 2.4%
Other Income 0 1 - 2 2 37.5%
Expenditure 865 934 8.0% 2,389 2,467 3.2%
Operating Profit (EBDIT) 52 45 -14.3% 150 133 -11.0%
Operating Profit Margin (%) 5.7% 4.5%   5.9% 5.1%  
Interest 17 14 -17.5% 60 53 -11.4%
Depreciation 15 17 14.5% 43 48 12.5%
Profit before Tax 21 15 -26.4% 49 35 -29.2%
Tax - -   - -  
Profit after Tax/(Loss) 21 15 -26.4% 49 35 -29.2%
Net profit margin (%) 2.3% 1.6%   1.9% 1.3%  
No. of Shares (m) 116.4 116.4   116.4 116.4  
Diluted Earnings per share (Rs)* 0.7 0.5   0.6 0.4  
P/E ratio (x)   59.0     77.5  
*(annualised)            

At the first look, the company's nine month performance (January-September 2003) hardly seems interesting. During this period, Henkel Spic reported just over 2% topline growth and a significant 29% dip in bottomline. However, if one looks at the September quarter performance in isolation, where the company has clocked nearly 7% topline growth, the picture begins to get interesting. However, it seems that growth in revenues has come at the cost of operating margins and competitive pressure continues to loom large.

Both its business segments, viz. detergents/cleansers and cosmetics did well in the September quarter. Detergents and cleansers division grew by nearly 8% in 3QFY04 and cosmetics logged in nearly 5% growth. However, both businesses saw pressure on margins.

(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Segment Revenues            
Detergents & Cleansers 579 624 7.8% 1,617 1,650 2.0%
Cosmetics 339 355 4.7% 922 950 3.1%
Total Revenues 918 979 6.6% 2,539 2,600 2.4%
Segment PBIT            
Detergents & Cleansers 24 18 -24.6% 68 54 -20.6%
Cosmetics 14 10 -26.8% 39 31 -19.7%
Total PBIT 37 28 -25.4% 107 86 -20.3%
Less: Interest 17 14 -17.5% 60 53 -11.4%
Less: Other unallocable expenditure 0 (1) - (2) (2) 37.5%
Profit before tax 21 15 -26.4% 49 35 -29.2%
Segment PBIT margin (%)            
Detergents & Cleansers 4.1% 2.9%   4.2% 3.3%  
Cosmetics 4.1% 2.8%   4.2% 3.3%  
Total PBIT margin (%) 4.1% 2.9%   4.2% 3.3%  

The company does see a lot of potential in the Indian market. The male grooming category as a whole is growing by 35% per annum and deodorants in particular emerging as a key-driver with a growth of 25% YoY. Globally, the German parent has presence in detergents and cleaning solutions (which it has introduced in India too). However, it is also a major player in the adhesives and sealants business in Europe and has products, which are largely similar to Pidilite in India. It also has a presence fragrances and skin care. As and when the parent decides to extrapolate its global portfolio, the Indian subsidiary will benefit.

On the flip side, the parent has not made it clear if and when this will happen. Also, there is always a concern that the parent may go in for a 100% subsidiary and introduce new products through that. Moreover, the company is still at a nascent stage of development as compared to its other MNC peers, who have the advantage of well-penetrated logistical support. Another concern is that the company has been writing off some extraordinary items that came in owing to Henkel's buyout of Shaw Wallace companies like Calcutta Chemicals and Detergents India in 1997-98. This has kept its net profits depressed.

With expectations of buoyant 2004, the company is likely to benefit from any upturn in consumer demand. Any support from the parent will also enhance the company's future prospects. The company's stock trades at Rs 31 and has gained over 60% in the last couple of months owing to the strong topline growth numbers in September quarter. If the strength is topline continues, the company could see an upward re-rating.

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