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Kodak: Taken on for a ride

Jul 3, 2001

One of the key losers on the bourses over the last one year is Kodak India. After touching its 52-week high of Rs 584 in February 2001, the scrip is currently trading at around Rs 200 levels, a decline of more than 66%. What has prompted the markets to react so adversely given the fact that the company is one of the market leaders in the film roll segment and has strong technological support from its parent company? The company’s core raw materials i.e. processing materials, films and chemicals, till FY00, was primarily imported. As a result, whenever the rupee depreciates sharply, Kodak suffers because of higher input costs, thus affecting operating margins. Though the operating margin of the company is on the rise, the fluctuations in input cost has hindered higher profit growth at the operating level.

To stem this fluctuations, the company had set up a colour negative paper manufacturing plant at Hetauda, Nepal, which was commissioned in September 1999 from where the core raw material was intended to be imported. However, the company could not source the negative paper from Nepal as it was unable to obtain the Certificate of Origin from the Nepal government on time. The impact is apparent from the first quarter results of the company in the current year.

Fluctuating profitability…
(%) FY98 FY99 FY00 FY01
Imported materials 83.0% 81.0% 88.0% 86.0%
Cost of sales 78.8% 79.1% 78.1% 73.3%
Operating margin 4.7% 4.3% 10.4% 11.2%
Change in operating profit - 2.2% 181.1% 21.1%

Kodak reported a sharp 74.7% decline in net profits to Rs 31 m as against a net profit of Rs 121 m in 1QFY01. The company has said that the change in product mix, exchange fluctuations and increase in duties in imported films in the current Budget have suppressed margins significantly. The drop in profits would have been higher but for lower interest and depreciation charges, which were lower by 56% respectively.

Another worrying fact is the 0.9% decline in sales to Rs 1,689 m in 1QFY02. If one were to take a closer look at the sales mix of the company over the last four years, contribution from film based revenues have come down from 62.2% of sales in FY98 to 51.2% of sales in FY01. On the other hand, contribution from processing and cameras have more than doubled (7.3% in FY98 to 14.9% in FY01). Since these are typically high-volume-low-margins business, overall margins have suffered.

But on the positive side, the company has also been installing film processing machines in an effort to push sales recently (this also derives lease rentals, which is incremental income for Kodak). Besides, Kodak has introduced new cameras targeted at the motion picture and health imaging industry, where Eastman Kodak (the parent company) is the market leader.

The scrip is currently trading at Rs 197 at a P/E multiple of 18.1x on annualised 1QFY02 earnings. But based on the earnings of FY01, the scrip is trading at 6.4x times. The company could witness a re-rating on the bourses if it manages to receive the certificate of origin from the Nepal government, against which Kodak has filed a writ petition.

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