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Competition ahoy… - Views on News from Equitymaster
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  • Nov 24, 2001

    Competition ahoy…

    Reckitt Benckiser India Limited (formerly Reckitt & Colman India) is India's leading player in the house cleaning, lavatory care, floor/shoe polishes, fabric care, insect repellants, ultramarine blue and anti-septic liquid segments. Reckitt has strong brands in each of its product segments. These include Dettol (antiseptic soap), Robin (liquid bleach), Cherry Blossom (shoe polish), Harpic (toilet cleaner), Mortein (insect repellent), Lizol (disinfectant), Colin (glass cleaner), anti-cold (Disprin) and Woolite (fine-fabric washing liquid).

    Household products form the largest chunk of Reckitt’s business. In FY01, this segment contributed over 54% to its turnover. Household care is Reckitt’s fastest growing business (36% per annum). Competition is intense in the specialised household cleaner (surface care) segment where Reckitt’s ‘Lizol’ (internationally called Lysol) controls nearly 40% market share. Lizol competes directly with Lever-Johnson's ‘Domex’, which controls over 50% market share.

    Over the last few years Reckitt has consciously focused on the household care business primarily because it sees a lot of growth in this segment. The use of these products is not very widespread in India. The penetration at an all India level is a tiny 11.4%, represented predominantly by large metros, wherein the penetration is 47.2%. (In the rural areas the penetration is as low as 4.3%). Most households use either low end products or ordinary detergents for their cleaning purposes.

    Reckitt’s strategy has been simple. Expand the household market and command a lion’s share of the segment. To lend focus to this strategy, in 1998 it set up Reckitt Piramal - a 3-party joint venture (JV) between RCIL (20% stake), Nicholas Piramal (40%) and Reckitt & Colman, UK (40%) to lend marketing thrust to its over the counter (OTC) pharmaceutical products. It transferred the marketing and distribution of its most established brands, Dettol and Disprin, to this JV. The aim was higher volume growth, since the JV had access to Nicholas Piramal's better doctor detailing and distribution network.

    Though the Reckitt Piramal JV has been called off recently, the strategy seemed to be paying off. According to an A&M survey in 1999, Dettol was ranked 3rd among the most recognized brands in India (it was ranked 10th in 1998). On the other hand, the contribution of household care to its turnover jumped up from 40.4% in 1997 to over 54% in 2001. This contribution is likely to increase in the coming years.

    In its other product segments i.e. insect repellant, shoe polish and liquid bleach, the company’s brands are among the top 3. Though ‘Harpic’ dominates the toilet cleaners' segment with over 65% market share, it contributes an estimated 5%-7% to the turnover. The company's Cherry Blossom range of shoe polishes also controls the market with a 75% share.

    In the insect repellant category, ‘Mortien’ commands nearly 20% market share and competes directly with Johnson-Lever's Raid and Bayer's Hit. Godrej is also a major player in this category (Goodknight brand).

    Mortein is expected to replace Dettol as its flagship brand. This is due to the fact that over the next 3-4 years while Mortein is estimated to grow at the rate of 20%-25%, Dettol would record lower growth of 10%-15%. The products under the Mortein brand include mosquito repellant coil, vaporizer and aerosol. The lower growth projections for Dettol have resulted from the sluggish sales in the soap market (soap being the main product under the Dettol brand). As a result the company has extended this brand to floor cleaners. The product is being test-marketed in Chennai and Kolkata. Reckitt has a marginal presence in the OTC pharmaceutical market with its Disprin brand. It is aiming to extend the Disprin portfolio by launching Disprin CV, a tablet for the treatment of cardiovascular disorders.

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

    But the ground reality is that, currently, Reckitt continues to be plagued by the slowdown and increasing competition in the household cleaning segment. The company has clocked a 6% decline in topline and 26% decline in profits (excluding extraordinary VRS expenses) during 3QFY02. The company's turnover growth stood at 16% in FY01.

    Financial snapshot
    (Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
    Net Sales 1,485 1,399 -5.8% 4,275 4,257 -0.4%
    Other Income 4 25 565.8% 61 51 -16.7%
    Expenditure 1,372 1,311 -4.4% 3,925 3,897 -0.7%
    Operating Profit (EBDIT) 113 88 -22.5% 351 360 2.6%
    Operating Profit Margin (%) 7.6% 6.3%   8.2% 8.4%  
    Interest 1 0   5 7 42.9%
    Depreciation 32 34 6.3% 102 96 -6.2%
    Profit before Tax 84 79 -5.7% 305 308 1.0%
    Tax 6 21 281.8% 78 135 73.6%
    Extraordinary expenses (VRS) -19 -10   -19 -31  
    Profit after Tax/(Loss) 60 48 -19.4% 209 143 -31.6%
    Net profit margin (%) 4.0% 3.5%   4.9% 3.3%  
    No. of Shares (eoy) (m) 32.9 32.9   32.9 32.9  
    Diluted Earnings per share* 7.3 5.9   8.5 5.8  
    Current P/e ratio   31.7     32.2  

    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 other income. Reckitt was hit hard on the expenditure front. The company's advertising expenditure during the quarter surged by 82% YoY. 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 September quarter, advertising to sales ratio stood at 23%. The company's tax expenditure too surged as a result of new guidelines of AS-22 (deferred taxes).

    However, on the brighter side, the VRS has already started paying 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 9 m FY02.

    Cost break-up
    (Rs m) 3QFY01 3QFY02 Change
    Raw material 824 551 -33.2%
    Staff 132 118 -10.2%
    Advertising 176 321 81.7%
    Others 240 322 34.2%
    Total expenditure 1,372 1,311 -4.4%

    Reckitt trades at a relatively high P/E of 24-27x 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. Reckitt faces intense competition from HLL’s Domex, Sara Lee’s ‘Good Knight’ and Jyothi Laboratories’ ‘Ujala’. With more international players eyeing the household care market in India, the going will get tougher for this company. Reckitt has to find ways to counter it otherwise the leadership it enjoys both in house cleaners as well as pest repellants may wane.



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