Reckitt: Ad budget hits margins… - Views on News from Equitymaster

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Reckitt: Ad budget hits margins…

Jul 31, 2002

Household cleaning products major, Reckitt Benckiser India Limited (Reckitt), has recorded a 7% dip in 2QFY03 topline and over 11% decline in net profit during the quarter. However, compared to the March quarter where it declared a 22% decline in sales and ended the quarter with Rs 22 m loss, the June quarter results are much better. Also, the dip in topline is small considering that last year's figures include the contribution from Reckitt Piramal, the company's erstwhile marketing joint venture, which was discontinued in July 2001.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net Sales 1,382 1,291 -6.5% 2,858 2,447 -14.4%
Other Income 18 31 73.9% 26 58 124.5%
Expenditure 1,233 1,248 1.2% 2,576 2,417 -6.2%
Operating Profit (EBDIT) 149 43 -71.1% 282 30 -89.5%
Operating Profit Margin (%) 10.8% 3.3%   9.9% 1.2%  
Interest 7 0 -98.5% 0 1 200.0%
Depreciation 30 32 8.0% 32 60 86.6%
Profit before Tax 130 41 -68.2% 275 27 -90.3%
Tax 82 -5 - 114 -11 -
Extraordinary expenses (VRS) -11 -13 - -21 -27 -
Profit after Tax/(Loss) 37 33 -11.1% 141 11 -92.1%
Net profit margin (%) 2.7% 2.5%   4.9% 0.5%  
No. of Shares (eoy) (m) 32.9 32.9   32.9 32.9  
Diluted Earnings per share* 4.5 4.0   8.6 0.7  
*(annualised)            
Current P/e ratio   62.0     366.2  

Though the company has managed to cut material costs by nearly 13%, a higher advertising budget has taken the wind out of operating margins. The company finished the quarter with very low operating margins, as ad budgets to sales ratio zoomed from 11.4% in 2QFY02 to 21.2% in 2QFY03. A similar trend was witnessed in FY02 results as well where ad expenses had shot up by 50% YoY. A higher other income and lower taxes saved the day for Reckitt.

Cost break-up
(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Raw material 717 622 -13.3% 1,543 1,117 -27.7%
Staff 116 128 9.5% 215 239 11.3%
Advertising 157 274 74.5% 314 551 75.4%
Others 253 238 -6.0% 515 524 1.7%
Total expenditure 1,244 1,261 1.4% 2,587 2,430 -6.1%

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.

The stock is range bound at Rs 247, largely due to the fact that Reckitt's first open offer to buyback shares at Rs 250 per share, resulted in the parent hiking its stake to 87.3% currently (from 51% earlier). The parent has given a second buyback offer to the remaining shareholders, again at Rs 250 in an effort to take the company private. If the parent is successful in acquiring over 90% of stake, then Reckitt India 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.

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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