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Reckitt losing sheen?

Nov 5, 2001

Reckitt Benckiser India Limited (Reckitt) continues to be plauged by the slowdown and the increasing competition in household cleaning segment. The company has clocked a 6% decline topline and 26% decline in profits (excluding extraordinary VRS expenses) during 3QFY02. In the previous quarter (2QFY02), Reckitt had reported a 3% decline in topline and a huge 42% decline in profits (excluding VRS expenses).

(Rs m)3QFY013QFY02Change9m FY01 9m FY02Change
Net Sales1,4851,399-5.8%4,2754,257-0.4%
Other Income425565.8%6151-16.7%
Expenditure1,3721,311-4.4%3,9253,897-0.7%
Operating Profit (EBDIT)11388-22.5%3513602.6%
Operating Profit Margin (%)7.6%6.3%8.2%8.4%
Interest 105742.9%
Depreciation32346.3%10296-6.2%
Profit before Tax8479-5.7%3053081.0%
Tax621281.8%7813573.6%
Extraordinary expenses (VRS)-19-10-19-31
Profit after Tax/(Loss)6048-19.4%209143-31.6%
Net profit margin (%)4.0%3.5%4.9%3.3%
No. of Shares (eoy) (m)32.932.932.932.9
Diluted Earnings per share*7.35.98.55.8
*(annualised)
Current P/e ratio31.732.2

Reckitt's 3QFY02 bottomline would have shrunk by over half as compared to the previous year, had it not been for a significant growth in its other income. Reckitt was hit hard on the expenditure front. The company's advertising expenditure during the quarter surged by 82%. This was due to the fact that Disprin and Dettol, its two main products, are now no longer in the Reckitt Piramal joint venture. Reckitt now markets these products on its own. In the current quarter advertising to sales ratio stood at 23%. The company's tax expenditure too surged as a result of new guidelines of AS-22.

Cost break-up
(Rs m)3QFY013QFY02Change
Raw material824551-33.2%
Staff132118-10.2%
Advertising17632181.7%
Others24032234.2%
Total expenditure1,3721,311-4.4%

However, on the brighter side, the VRS has already started showing effect. The company's staff costs declined by over 10% during the quarter. Its raw material costs too declined significantly.

On a nine month consolidated basis, Reckitt's topline has declined marginally. However, its net profit has declined by nearly 24% (excluding VRS expenses). Its operating margins have shown a slight improvement during 9m FY02.

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. These strategies are further expected to help in improving its performance in the future.

At Rs 186 Reckitt trades at a relatively high P/E of 26 x annualised nine month FY02 earnings (excluding VRS expenses). This is probably because the markets anticipate that the company's topline and bottomline would improve once Reckitt has stabilised its merger with Benckiser and starts launching Benckiser products in a big way. However, competition has become the company's bane. The company has to deal with it otherwise the leadership it enjoys both in house cleaners as well as pest repellants may wane.

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