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Kodak: Fails to enthuse - Views on News from Equitymaster
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  • Jun 13, 2002

    Kodak: Fails to enthuse

    It has been a roller coaster ride for Kodak India over the last three years. After failing to commence production at its Nepal facility in absence of 'Certificate of Commencement of Business' from the Nepal government, the company had targeted to improve its operational efficiency to boost profits. The results are already evident from the first quarter performance of the company.

    (Rs m) 1QFY02 1QFY03 Change
    Net sales 1,689 1,871 10.8%
    Other Income 5 6 22.2%
    Expenditure 1,619 1,784 10.2%
    Operating Profit (EBDIT) 70 88 24.6%
    Operating Profit Margin (%) 4.2% 4.7%  
    Interest 4 3 -27.3%
    Depreciation 20 26 32.2%
    Profit before Tax 51 64 25.9%
    Tax 20 25 23.5%
    Profit after Tax/(Loss) 31 39 27.5%
    Net profit margin (%) 1.8% 2.1%  
    No. of Shares (m) 11.2 11.2  
    Diluted Earnings per share* 10.9 13.9  
    P/E Ratio (x)   17.3  
    * annualised      

    Sales grew at a healthy rate of 11% to Rs 1,871 m in 1QFY03 as compared to Rs 1,689 m in the corresponding period previous year. The company derives almost 60% of revenues from the consumer photographic segment, which comprises of cameras, films and processing products. Though it faces competition from cheaper imports, it has priced its products on a 'value for money' plank, as a result of which volume growth has been healthier.

    But Kodak faces problems in improving its operating margins. Since it imports a key portion of raw materials, whenever rupee depreciates, margins tend to fall at a faster clip. To circumvent this, it had set up a plant at Nepal for a consideration of Rs 25 m, which had to be written off in FY02 due to the aforesaid reason. This combined with agressive pricing strategy had a significant impact on Kodak's margins. Operating margins in FY02 stood at 6.5% as compared to 11.2% in FY01. This year, by adopting a procurement strategy as well as increasing contribution from commercial segment (products catering to cinematography, health and digital imaging), it had targeted at higher margins. In 1QFY03, as a result, margins at the operating level have gone up by 50 basis points.

    Despite higher provisions for deferred taxation, a notable fall in interest outgo, enabled Kodak to post a 28% rise in profits. However, it has to be mentioned that last year Kodak posted a 75% fall in profits and profit growth in the first quarter has to be viewed in that context. The outlook for the rest of the year remains challenging for the company. There seem to be no major improvement at the macro level and given the fact that tourism industry has been affected, consumer segment of the company would continue to witness pricing pressure. But we expect the contribution from the commercial segment to increase in the future and consequently, revenue mix would also change thus benefiting company in the long run.

    The stock currently trades at Rs 235 implying a P/E multiple of 17x 1QFY03 annualised earnings. We expect the company to record a net profit of around Rs 290 m for FY03 and consequently, P/E multiple works out to be 10x FY03E earnings.



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