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Reckitt: Poor 1Q strengthens open offer

Apr 24, 2002

Household cleaning products major, Reckitt Benckiser India Limited (Reckitt), recorded a 22% decline in its 1QFY03 topline. It ended the quarter with Rs 22 m loss. The decline in the topline could be attributed to the discontinuation of its marketing joint venture, Reckitt Piramal, in July 2001.

(Rs m) 1QFY02 1QFY03 Change FY02
Net Sales 1,477 1,156 -21.8% 5,884
Other Income 8 27 234.6% 80
Expenditure 1,344 1,169 -13.0% 5,418
Operating Profit (EBDIT) 133 -14 - 466
Operating Profit Margin (%) 9.0% -1.2%   7.9%
Interest 0 1 166.7% 0
Depreciation 32 27 -14.4% 158
Profit before Tax 109 -15 - 387
Tax 32 -6 - 134
Extraordinary expenses (VRS) -10 -13 - -39
Profit after Tax/(Loss) 67 -22 - 214
Net profit margin (%) 4.6% -1.9%   3.6%
No. of Shares (eoy) (m) 32.9 32.9   32.9
Diluted Earnings per share* 8.2 -2.6   6.5
Current P/e ratio       37.3

Though the company has managed to cut material costs by nearly 40% YoY, a higher advertising budget has taken the wind out of operating margins. The company finished the quarter with a negative operating profit as ad budgets to sales ratio zoomed from 10% in 1QFY02 to 24% in 1QFY03. A similar trend was witnessed in FY02 results as well where ad expenses shot up by 50% YoY.

The past year has not been good for the company as it lost the ambitious, Mr. Pranab Barua as MD. Also, due to the company's Reckitt Piramal JV call off, Reckitt could not concentrate on the brands under this JV mainly Dettol and Disprin and also on its growth strategy for the household cleaning segment.

Ratio to sales
  1QFY02 1QFY03
Raw material 55.9% 42.8%
Staff 6.7% 9.6%
Advertising 10.6% 24.0%
Others 17.8% 24.8%
Total expenditure 91.0% 101.2%

The stock is range bound at Rs 242, largely due to the fact the Reckitt's parent has given an open offer at Rs 250 per share to the remaining 49% equity holders in an effort to take the company private. If the company does get a successful response like the Cadbury open offer did, then Reckitt is most likely to vanish from the Indian bourses soon. Given the company's recent staid performance, investors are likely to accept the open offer and exit the stock. Even if some investors don't, they run the risk of being marginalised as liquidity in the stock is likely to dry up and the second buyback offer from the parent may not be as attractive.

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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