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Nirma: Backward integration benefits

Oct 28, 2003

Detergent major, Nirma Limited, has recently reported its September quarter performance. While the company's revenues have improved by a healthy 9%, the company's bottomline is up by nearly 15%.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Net Sales Turnover 4,572 4,969 8.7% 10,100 10,689 5.8%
Other Income 53 72 36.2% 81 115 42.6%
Expenditure 3,452 3,611 4.6% 7,704 8,061 4.6%
Operating Profit (EBDIT) 1,120 1,358 21.2% 2,396 2,628 9.7%
Operating Profit Margin (%) 24.5% 27.3%   23.7% 24.6%  
Interest 130 167 28.5% 319 246 -22.9%
Depreciation 319 378 18.6% 610 689 12.9%
Profit before Tax 724 885 22.2% 1,547 1,808 16.8%
Extraordinary items -13 -79 - -19 -79 -
Tax 196 216 10.0% 559 539 -3.6%
Profit after Tax/(Loss) 515 590 14.7% 969 1,190 22.8%
Net profit margin (%) 11.3% 11.9%   9.6% 11.1%  
No. of Shares (eoy) (m) 79.4 79.4   79.4 79.4  
Earnings per share* 25.9 29.8   24.4 30.0  
*(annualised)            
Current P/e ratio   11.4     11.3  

What is encouraging about the company's performance is its expanding operating margins. Nirma's operating margins have expanded by nearly 300 basis points to over 27% during the quarter. The key reason for this is the company's backward integration moves. The company's de-bottlenecking and expansion of the Soda Ash plant in Gujarat was completed recently. The exercise involved a capex of over Rs 957 m by the company. Over the last 5 years Nirma has made a capex of almost Rs 20 bn towards backward integration. The backward integration drive has helped Nirma maintain healthy margins, while making available its products at competitive rates.

The company's depreciation and interest expenses seem to have gone up backed by the addition of assets (by way of backward integration). The company recently received the High Court's approval to demerge the operating division of Nirma Industries Limited. The exceptional item of Rs 79 m refers to the operating loss of this division. But for this, the company's performance at the profit levels would have been even better.

Cost break-up
As a % of sales 2QFY03 2QFY04 1HFY03 1HFY04
Material cost 55.4% 53.9% 58.8% 57.6%
Staff cost 2.1% 2.0% 1.9% 1.9%
Other exp. 17.9% 16.7% 15.6% 15.8%
Total expenses 75.5% 72.7% 76.3% 75.4%

The company has been facing stiff competition on its 'value' plank for detergents. While HLL's 'Wheel' continues to be a bane for the company, smaller players like 'Doctor' are also addressing the same customer base. Nirma's attempts to expand its product folio through toilet soaps (Nima), salt and oral care has not made much headway.

At Rs 338 the stock trades at 11.3x annualised 1HFY04 earnings and market cap to sales of 1.3x. Nirma traditionally is accorded lower valuations as compared to peers owing to the family run nature of the company, as well as its dependence on its flagship product. With the economic downturn, bigger companies like Hindustan Lever have stepped on the competitive gas. This has put pressure on Nirma's growth, which operates on a value for money strategy and has been unable to expand its product profile successfully.

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