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Archies: In doldrums

May 20, 2003

For Archies Ltd. FY03 has been a rather disappointing year, where topline fell by 5% and net profit eroded by 59%. The company has attributed the poor performance during the year to the economic slowdown and non performance of some of its business modules. Lets take a deeper look at the performance of the company during the year.

(Rs m)FY02FY03Change
Net Sales Turnover805762-5.3%
Other Income5852.7%
Operating Profit (EBDIT)13564-52.9%
Operating Profit Margin (%)16.8%8.4%
Interest 87-15.7%
Profit before Tax11950-57.8%
Profit after Tax/(Loss)7531-59.2%
Net profit margin (%)9.4%4.0%
No. of Shares (eoy) (m)6.56.5
Earnings per share*11.64.7
Current P/E ratio12.3

The economic slowdown has affected most industries during FY03 but for Archies it has been very depressing as almost all its strategic business units (SBUs) have performed below par over the previous period. Its core business of greeting cards (which contributed 48% to total revenues) has fallen by 3% YoY. the other large SBU i.e. gifts (22% of revenues) has also shown a 1% decline in sales. But the perfumes business (11% of revenues) was the worst affected and revenues from this business fell by over 23%.

At the operational level, total expenditure has gone up by 4% (mainly due to changes in the value of inventory), although the company has been able to curb most of its expenses during the year, staff cost went up 12% as a result of which operating margins fell by 840 basis points. The woeful performance can if compared with FY00, where operating margins had peaked at 29%, indicate that, there has been a continuous downturn in the fortunes of the company.

Cost break-up
(Rs m)FY02% of net salesFY03% of net sales
Increase/Decrease in stock(91)-11.4%10.1%
Material cost17121.2%15320.0%
Purchase of trading items21927.2%17723.2%
Staff cost617.5%688.9%
Other exp.31038.5%30039.4%
Total expenses670699

Interest costs have gone down by 16%, mainly due to fall in the interest rates during the year. As a result of which, the company has been able to restructure its debts. But even falling interest expenses have not been able to ensure net profit growth. Net Profit has fallen by 59% in FY03.

At Rs 58, the stock trades at a P/E of nearly 12x FY03 earnings. The company has hived off its loss making perfume business but continues to operate its online business, Archies Ltd., although after taking downsizing measures. Apart from this, the company would be relocating its retail outlets, which contribute significantly to the topline. This move could give the required fillip to its sagging businesses. So even though Archies is likely to dominate the greeting cards and gifts market in India, in the near term the company has to look at improving its operational efficiencies. Until then the stock could languish at these levels.

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