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Reckitt 2QFY02: Tax blues - Views on News from Equitymaster
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  • Jul 24, 2001

    Reckitt 2QFY02: Tax blues

    Reckitt Benckiser (India) Limited (formerly Reckitt & Colman of India) has recorded a 3.2% decline in turnover in 2QFY02. The downturn in the economy has taken a toll on the company's turnover growth, which stood at 16% in FY01. The company's net profit has slumped by 55% to Rs 37 m on account of higher taxes.

    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Net Sales 1,427 1,382 -3.2% 2,790 2,858 2.4%
    Other Income 43 18 -59.1% 57 26 -55.2%
    Expenditure 1,307 1,233 -5.7% 2,553 2,586 1.3%
    Operating Profit (EBDIT) 120 149 23.9% 237 272 14.6%
    Operating Profit Margin (%) 8.4% 10.8%   8.5% 9.5%  
    Interest 1 7 570.0% 4 7 84.2%
    Depreciation 39 30 -23.3% 70 62 -11.8%
    Profit before Tax 123 130 5.4% 221 229 3.6%
    Tax 41 82 100.0% 72 114 57.7%
    Extraordinary expenses (VRS) - (11)   - (21)  
    Profit after Tax/(Loss) 82 37 -55.2% 149 94 -36.6%
    Net profit margin (%) 5.7% 2.7%   5.3% 3.3%  
    No. of Shares (eoy) (m) 32.9 32.9   32.9 32.9  
    Diluted Earnings per share* 10.0 4.5   9.0 5.7  
    Current P/e ratio   39.2     30.5  

    Reckitt is the market leader in the household care segment. Its portfolio includes ultramarine blue, antiseptics, polishes, cosmetics, insect repellants and pharmaceuticals. The company has strong brands in each product segment it operates in. These include Robin (liquid bleach), Cherry Blossom (shoe polish), Harpic (toilet cleaner), Mortein (insect repellent), Lizol (disinfectant), Colin (glass cleaner) and Woolite (fine-fabric washing liquid)

    The market continued to be depressed during the second quarter. Reckitt grew in categories like pest control, air care, lavatory care, but growth was negative in fabric care and floor care. Moreover, the growth was further impacted as sales to the company's joint venture, Reckitt Piramal Limited, was restricted in view of the anticipated restructuring.

    Reckitt's profits were hit as it had to provide an additional income tax of Rs 37.3 m during the second quarter 2001, due to the amendment of the Income Tax Act (regarding allowability of VRS expenses over five years) with retrospect effect from financial year beginning April 2000. Another reason for Reckitt's low profitability was a decline in other income by 59%. Reckitt's profit before tax grew by a marginal 5%, underlining the effect of the higher taxes and the VRS expenses amounting to Rs 11 m during the quarter.

    During the current year, Reckitt is planning to launch mass market products from its parent's stable. The products are likely to be in the home care category, a business which Reckitt acquired internationally after its merger with Benckiser. The company expects the new products to contribute 20-22% of its total business in the current year. It also intends to penetrate rural markets aggressively by increasing distribution network. Apart from cost reduction exercise, these strategies of the company are further expected to help in maintaining its performance in the future.

    At the current price of Rs 175, the stock trades at a P/e multiple of 31 times its annualised 1HFY02 earnings with a market cap to sales ratio of 1 time. Considering Reckitt's future plans, its dominant position in the household care segment and its strong balance sheet, notwithstanding the current dismal performance, with a long term view the stock seems attractively placed.



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