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Archies: Bottoming out - Views on News from Equitymaster
 
 
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  • Mar 30, 2001

    Archies: Bottoming out

    Archies Greetings & Gifts is India's largest creator and distributor of greeting cards, stationery, gifts and related social expression products. It commands 45% of the Rs 3 bn Indian greeting cards market. Apart from selling cards under its own label, it sells Gibsons, Paper Magic and Paper Rose cards through a licencing arrangement with global majors. The company has also diversified into marketing music CDs, cassettes and perfumes. Almost 70% of its FY00 revenues came from selling greeting cards.

    Archies was discovered by investors in 1999 and since then it became one of their favourites. It had everything going for it then. A known brand, huge market share and a growing market. Between FY97 and FY00, the company's turnover surged at a CAGR of 28% and its net profit grew at a CAGR of 77%. But since then Archies growth has slackened.

    (Rs m) 3QFY00 3QFY01 Change 9m FY00 9m FY01 Change
    Sales 252 238 -5.7% 559 530 -5.0%
    Other income 2 2 -6.3% 5 5 6.4%
    Total expenditure 162 163 0.9% 384 373 -2.7%
    Operating Profit (EBDIT) 91 75 -17.6% 175 157 -10.1%
    Operating Profit Margin (%) 36.0% 31.5%   31.3% 29.6%  
    Interest 0 3 - 0 6 -
    Depreciation 2 3 25.0% 7 9 22.5%
    Profit before Tax 90 70 -22.1% 172 147 -14.7%
    Tax 0 0 - 0 0 -
    Profit after Tax/(Loss) 90 70 -22.1% 172 147 -14.7%
    Net profit margin (%) 35.7% 29.5%   30.8% 27.7%  
    No. of Shares (eoy) (m) 6.5 6.5   6.5 6.5  
    Earnings per share*       35.3 30.1  
    *(annualised)            
    Current P/e ratio         2.5  

    For the first nine months in FY01, the company's topline has shown a decline of 5% and its bottomline has shrunk by nearly 15%. FY01 has not shaped well for the company largely because the number of young adults sending electronic greeting cards through the Internet has increased dramatically. This and the slowdown in the bourses has resulted in Archies stock price hovering around its 52 week low.

    Notwithstanding the current slowdown, the company's financials are still in good shape. Archies still holds a sizeable chunk of the greeting card market. It has gone online (archiesonline.com) and has done well in the e-cards segment and provides e-cards to Yahoo sites as well. Mr. Anil Moolchandani, the chairman of Archies, has been quoted in a leading financial daily as saying that during the nine month period, 54 million Archies cards were sent over the Internet. But whatever the traffic on the Internet, all these e-cards are free, hence no revenues for the company. Though Archies plans to charge for this service later, how many users will like to pay up for using e-cards is a big question mark.

    For growth the company realises the need to expand its target audience. It has come out with regional language cards and started catering to regional occasions. The company has been concentrating on increasing its distribution network. It now has 487 franchisees (including 22 company owned outlets). Archies has also targeted to sell cards and gift articles to corporate clients, which include Reliance, Bank of America, Dabur, LIC and Samsung.

    Though e-cards have caught up, but one must keep in mind that only about 3 million Indians use the Internet. Added to this, Archies efforts to expand its customer base are likely to result in growth in FY02. But volume growth this time could come at the cost of decline in margins.

    At the current price of Rs 74, Archies trades at a P/e of 2.5 times its annualised FY01 earnings. Given the current situation the company is in, the valuation looks reasonable as all the negatives seem to be factored in the price. Given Archies growth initiative a re-rating looks likely.

     

     

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