Nirma: Standing the test of time

Nirma Limited, a pioneer in introducing low cost detergents and soaps in India is about to declare its second quarter results in the next couple of days. Let’s take a look at its past performance to get some idea on what this quarter hold for it. Nirma manufactures and sells detergents (cakes and powders), soaps, soap intermediates (alfa olefin sulphonate (AOS)). A pioneer in introducing low-cost detergents through low-cost inputs and low overheads (production in the unorganised sector), it has by passed MNCs like HLL, P&G to become the market leader (in terms of volumes) in this price-sensitive industry. In value terms, Nirma holds 16% market share in the branded detergents segment.

(Rs m)	FY99	FY00	Change
Sales	14,730	17,176	16.6%
Other Income	232	349	50.4%
Operating Profit (EBDIT)	2,297	3,497	52.2%
Operating Profit Margin (%)	15.6%	20.4%
Interest	304	557	83.2%
Depreciation	319	628	96.9%
Profit before Tax	1,906	2,661	39.6%
Tax	201	320	59.2%
Profit after Tax/(Loss)	1,705	2,341	37.3%
Net profit margin (%)	11.6%	13.6%
Earnings per share*	50.30	69.10
(annualised)

Nirma has consistently improved both its topline and bottomline year after year. In fact, its turnover has spurted at a compounded annual growth rate (CAGR) of 21% in the last three years. Its net profits have grown at a CAGR of 24% underlining the company’s consistency to perform. Compared to this its biggest rival, Hindustan Lever’s (HLL) turnover has grown at CAGR of 14% during the same period. Its profits however, have grown at an impressive CAGR of 35%.

It is in the current year that the difference in both the company’s growth patterns comes to the fore. HLL’s turnover grew by a marginal 4% in the quarter ended June 30, 2000 as compared to the corresponding quarter in the previous year (i.e. June 30, 1999). Its profits however, grew by an encouraging 26% during the same period (aided largely by other income). On the other hand, Nirma’s turnover grew at a blazing 55% during the same quarter and its profits by a remarkable 32%.

Quarter ended June 30, 2000 performance (Rs m) HLL Nirma Sales 28,797 5,521 Net Profit 2,867 674 Operating magin 12.0% 22.5% Net profit margin 10.0% 12.2%

The difference in the performance is probably because of Nirma’s backward integration into linear alkyl benzene (LAB), a raw material, which has helped it cut costs, thereby expanding its market and hence topline growth. On the other hand, HLL has been hit probably because of its large size. Not all its products are doing well. In beverages, it is conceding market share to Tata Tea. In oral care Colgate has cleaned up its act. In HLL’s main focus market i.e. the rural areas; consumption growth has been slow because of bad monsoon in states like Gujarat.

The situation for HLL has worsened in its third quarter results (period ending September 30, 2000). Its topline grew by a miniscule 0.4%. It saw a profit growth of 16% largely because of a spurt in other income. These results by HLL, a consumer products giant, should give some worrying signals for Nirma too. But going by its past consistency in performance, its cost control measures and the target market, it is unlikely that the company will fare as badly as HLL.

Nirma’s second phase of LAB project was to manufacture 65,000 tpa of N-Paraffin, which is used for manufacture of LAB. The N-Paraffin project has become operational in June 2000. The whole exercise will offer Nirma greater control over cost of raw materials and thus help it maintain its margins.

Though the company’s turnover might show signs of a slower growth as a result of bad monsoon, and its profitability might get deflated because of high interest and depreciation costs, and also because of the hike in oil prices, the company should put in a reasonably good performance.