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Kodak: Will it 'click' this time?

Mar 27, 2002

It has been a roller coaster ride for Kodak India, the Indian subsidiary of Eastman Kodak, for the year ended December 31, 2001. Though the company has managed to post higher growth in sales in all the four quarters, operating margins have plummeted on account of host of factors.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net sales 1,744 2,014 15.5% 6,674 7,335 9.9%
Other Income 8 8 -1.2% 46 21 -54.6%
Expenditure 1,666 1,763 5.8% 5,969 6,886 15.4%
Operating Profit (EBDIT) 78 252 221.7% 706 449 -36.4%
Operating Profit Margin (%) 4.5% 12.5%   10.6% 6.1%  
Interest 6 3 -45.9% 31 15 -53.5%
Depreciation 25 26 6.9% 123 89 -28.0%
Profit before Tax 56 230 313.1% 597 367 -38.6%
Extraordinary items 30 -   - (25)  
Tax 44 85 92.0% 256 132 -48.5%
Profit after Tax/(Loss) 42 146 249.2% 341 210 -38.5%
Net profit margin (%) 2.4% 7.2%   5.1% 2.9%  
No. of Shares (m) 11.2 11.2   11.2 11.2  
Diluted Earnings per share 14.9 52.0   30.5 18.7  
P/E Ratio (x)   4.3     11.9  

Turnover for the year ended December 31, 2001 has increased by 10% to Rs 7,335 m. The company derives almost 51% of turnover through sale of Kodak films, both camera rolls as well as for other user industries like the motion picture sector. Last year, movies like 'Mohabbatein' and 'Mission Kashmir' were shot using the company's 'Vision Films' under its entertainment imaging business unit. However, Kodak has been gradually reducing its dependence on its films division over the years by concentrating on other segments like cameras and papers used for imaging and printing. To put things in perspective, contribution from sale of films as a percentage of sales has come down from as high as 69% in FY97 to 51% in FY01. On the other hand, papers and camera divisions contribution has increased from 25% in FY97 to 44% in FY01. The trend is expected to continue in the future also in light of increasing competition from domestic players like Fuji and Konica as well as from cheaper imports.

Growth in sales in the second half of the current fiscal was higher as compared to the first half. This could be attributed to the festive and holiday season demand for film rolls in the later half. Besides, the company has been expanding the Kodak Express outlets aggressively over the last two years (in FY01 Kodak added 106 new outlets) and this is reflected in the company's topline growth numbers.

But the company's performance at the operating level is far from satisfying. The main reason is its high dependence on imports for both raw materials and select finished goods. This along with rupee depreciation has had a significant impact on margins of the company. This has been the case historically also. But to circumvent this problem and reduce its dependency on imports, the company had set up a manufacturing plant in Nepal. However, the unit was unable to commence manufacturing as it failed to receive the Certificate of Origin from the Nepal government on time. Kodak had filed a writ with the Supreme Court of Nepal for the grant of the same last year. Though the company was hopeful of receiving the certificate in the current fiscal, due to uncertain political scene in Nepal, the grant was not received. The company had shut down the plant in Nepal and full provision for the write down of the company's investment of Rs 25 m in the Nepal plant has been provided in the current fiscal.

Apart from imports, changing product mix also seems to have affected company's profitability. Slowdown in the economy, initial investments for setting up of Kodak outlets, cheaper imports and the consequent pressure on camera roll prices, low margin camera business and higher promotional expenses also have affected margins. However, over the longer term, this should benefit the company in terms of higher volume growth. After plummeting sharply for three consecutive quarters, operating margin in 4QFY02 has gone up significantly. The company has attributed this to better procurement prices for select products, which has neutralised costly imports to a certain extent. While net profit in 4QFY02 has shown a sharp jump, for the full year ended December 31, 2001, net profit has declined by 39% to Rs 210 m.

The stock currently trades at Rs 224 implying a P/E multiple of 11.9x FY02 earnings. After touching its 52-week low of Rs 155 in July-August 2001, the stock has recovered reflecting the improvement in performance in 2HFY02. While growth prospects remains challenging for its films division in light of cheaper imports and slowdown in the economy, the company's efforts to diversify into other value added segments like motion picture and health imaging could provide Kodak a technological edge in the long run. But it needs to address its heavy dependence on imports so as to bring stability and visibility to its earnings, which has been a cause of concern. Will the management address this critical issue?

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