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Reckitt: Joins open offer bandwagon - Views on News from Equitymaster
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  • Mar 14, 2002

    Reckitt: Joins open offer bandwagon

    Reckitt Benckiser India Limited (Reckitt) is in the news. The company has just declared its annual results. What's more, its parent has chosen to take the 'Cadbury way', i.e. the management has given an open offer to the remaining 49% equity shareholders at Rs 250 per share. We analyse both the events.

    (Rs m) FY01 FY02 Change
    Net Sales 5,849 5,884 0.6%
    Other Income 85 80 -5.7%
    Expenditure 5,445 5,418 -0.5%
    Operating Profit (EBDIT) 405 466 15.2%
    Operating Profit Margin (%) 6.9% 7.9%  
    Interest 5 0  
    Depreciation 145 158 9.0%
    Profit before Tax 339 387 14.1%
    Tax 88 134 52.7%
    Extraordinary expenses (VRS) -39 -39  
    Profit after Tax/(Loss) 213 214 0.9%
    Net profit margin (%) 3.6% 3.6%  
    No. of Shares (eoy) (m) 32.9 32.9  
    Diluted Earnings per share* 6.5 6.5  
    Current P/e ratio   36.7  

    First the results. Reckitt declared a marginal rise in both FY02 topline and bottomline. The year was not good for the company as it lost the ambitious, Mr. Pranab Barua as MD. Also, the company's marketing joint venture Reckitt Piramal was called off. Due to the JV call off, the company could not concentrate on the brands under this JV mainly Dettol and Disprin and also on its growth strategy for the household cleaning segment.

    However, on the brighter side, the management was able to cut raw material costs. However, this was more or less negated by a significant rise in ad budgets (up by nearly 50% YoY). Its competitors HLL and Henkel had begun to turn on the heat in the household cleaning segment. Also, Reckitt's strategy was to introduce new brands. All this meant higher ad expenditure. The company somehow managed to cut costs marginally, thus improving operating margins by a 100 basis points to 7.9%. A higher depreciation provisioning meant that Reckitt finished the year with more or less the same earnings as the previous year.

    Cost break-up
    (Rs m) FY01 FY02 Change
    Raw material 3,283 2,863 -12.8%
    Staff 446 476 6.7%
    Advertising 610 907 48.6%
    Others 1,106 1,172 6.0%
    Total expenditure 5,445 5,418 -0.5%

    The stock is trading at Rs 239, at a high P/E of 36.7x FY02 earnings. The stock had started moving up for two reasons. For one, investors saw that 2001 was a an extraordinarily bad year for Reckitt and consequently, anticipated that Reckitt will turnaround in the coming years. Secondly, the markets seemed to have got wind of an imminent buyback or open offer. Thus, the high valuations.

    And sure enough, Reckitt's parent announced the open offer at Rs 250 per share in a bid to take its stake upto 100%. The question is that should investors go for this buyback. Going by what's happened during Cadbury's buyback, one should go in for the offer. If the management manages to corner a large chunk of the shareholding, the liquidity in the stock gets squeezed and the stock price becomes range bound, as in the case of Cadbury. Also, going by current results, the valuations seem fair.

    Having said that, the Reckitt management sees India as a big market in the coming years and thus has decided to take the company private when the valuations are seemingly low. With more MNC companies following the same pattern, the Indian investors will slowly see a dearth of quality companies to invest in. Stock picking is likely to become even more important going forward. Also, in the FMCG spectrum, investors might take a second look at domestic companies for growth.



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