Archies: Greetings not so great!

Introduction to results

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Gifts and greetings card major, Archies, has seen its market capitalisation improve by over 20% and then lose it all. This has happened all in a space of the 3 month period between January 2005 to March 2005 (till date). Let us evaluate the company's business and prospects in this article.

(Rs m)	3QFY04	3QFY05	Change	9mFY04	9mFY05	Change
Net Sales	233	239	2.5%	517	558	8.1%
Expenditure	190	195	2.9%	428	463	8.2%
Operating Profit (EBDITA)	44	44	0.8%	89	96	7.5%
EBDITA margin (%)	18.7%	18.4%		17.2%	17.1%
Other income	2	3	41.7%	7	8	23.2%
Interest	1	2	16.7%	4	4	-0.3%
Depreciation	4	4	8.9%	12	12	0.2%
Profit before Tax	40	41	1.3%	80	89	10.3%
Tax	15	15	1.7%	29	33	15.2%
Profit after Tax	25	26	1.0%	52	56	7.5%
Net profit margin (%)	10.9%	10.7%		10.0%	10.0%
No. of Shares (m)	6.5	6.5		6.5	6.5
Diluted Earnings per share (Rs)*	15.6	15.7		10.6	11.4
P/E ratio (x)					6.4
(* annualised)

The company reported a minor 3% revenue growth during the December quarter (2004) and a negligible profit growth. During the nine month period (9mFY05), the company clocked an 8% revenue and a similar profit growth. The company's operating margins were largely steady, both for the quarter and the nine month period.

What's the company's business?

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Archies has over 40% market share in the greeting cards segment, which is its core business area (48% of total FY04 revenues). Apart from greeting cards, the company also has perfumes, gifts and stationary divisions under its portfolio of products. The company's core business of greeting cards has been facing pressure with greater Internet usage for greetings, as well as new entrants.

What has driven performance in 9mFY05?

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Greeting cards - a sluggish business:  The company's key contributor to revenues, greeting cards, is under continued pressure. Revenues of this segment were down 11% during the quarter and 5% during the nine month period. Greeting cards is largely an urban phenomenon. With increasing availability of the Internet, sending greetings via the net has become a viable alternative, as compared to the card. There are many websites that offer free greeting cards to be sent. Though Archies too has an online offering, it is largely paid. Also, entry of agressive players like ITC into the segment (ITC is already the No. 2 in this segment with a 20% share), Archies' key business is under further cloud.

Gifts - the redeeming factor:  The company's business of 'gifts' has meanwhile, clocked an encouraging growth. While revenues from this business were up 25% in the quarter, the nine month period saw 37% growth for this segment. As a result of the strong growth, the business' share in total revenues has gone up from 29% in 9mFY04 to nearly 37% in 9mFY05. This has been the saving grace for Archies' overall performance. The company's stationery business has done nothing much to write home about.

Segment revenue snapshot

(Rs m)	3QFY04	3QFY05	Change	9mFY04	9mFY05	Change	9mFY05 revenue mix	9mFY05 PBIT contribution
Greeting Cards	138	123	-11.1%	277	263	-5.3%	47.0%	66.4%
PBIT margin (%)	29.1%	27.9%		31.6%	31.2%
Stationery Items	33	34	1.0%	73	76	3.8%	13.6%	13.3%
PBIT margin (%)	21.3%	22.5%		21.2%	21.6%
Gifts	62	77	25.1%	149	204	36.5%	36.5%	19.5%
PBIT margin (%)	8.3%	14.7%		7.9%	11.8%
Others	7	6	-16.6%	20	16	-22.2%	2.9%	0.8%
PBIT margin (%)	18.4%	8.8%		15.5%	6.4%
Perfume	-6	0	-100.0%	-4	0	-100.0%	0.0%	0.0%
Net Sales/Income from operations	234	240	2.5%	518	559	8.0%	100.0%	100.0%
Total PBIT margin (%)	21.5%	22.4%		21.6%	22.0%

Profitability report:  As mentioned earlier, the company has managed to retain its profitability, despite a sluggish showing in its core business of greeting cards. The company's earns the highest margins from the cards business and any sluggishness in this should reflect in the profit growth. This has not happened in 9mFY05, primarily because the company's other key revenue contributor - Gifts, has seen its margins improve signficantly during the period under review, thereby balancing the overall profitability. Consequetly, the company's bottomline growth in 9mFY05 has reflected the topline trend, despite higher effective tax rate at 37%.

Cost break-up

as a % of net sales	3QFY04	3QFY05	9mFY04	9mFY05
Total Cost of goods	38.3%	38.4%	36.0%	36.2%
Staff Cost	7.1%	7.2%	9.1%	8.9%
Other Expenditure	35.8%	36.0%	37.7%	37.8%
Total expenditure	81.3%	81.6%	82.8%	82.9%

What to expect?

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In the last 5 years (till FY05), the company's revenues have clocked an insignificant 2.4% CAGR, with profits remaining where they were in FY01. This in itself highlights the state 'greeting cards' are in. There was a time when 'Archies' was considered to be in the right business, when cards were in vogue. The arrival of Internet and new competition has changed all that.

At the current price of Rs 73 the stock trades at a modest 6.4 times its 9mFY05 annualised earnings and market cap. to sales of 0.7x. However, the sluggishness of its business portfolio has led to the waning of investor interest in this category. Should the company sustain its growth in the gifts business, things may look up for this company. At the end of FY04, the company had outlined plans to add 100 retail stores over the next 5 years (till 2009). This reach may help it improve its volumes, but this may also entail cash flow pressure in the medium to long term. At the current juncture, though valuations look attractive, growth is a concern. The strategy should be wait and watch.