Henkel SPIC: Hold/Buy on declines

Recommendation: Hold/Buy on declines

B. Krishnakumar

IN AN industry characterised by intense competition and the presence of strong domestic and multinational companies, Chennai-based Henkel SPIC has carved a niche for itself.

After a sedate start, the company posted a steady recovery over the last three years. The technical-cum-financial backing of its German partner, Henkel KgaA, and the consistent efforts to enhance capacity utilisation have played a key role in pushing the company into the recovery mode.

Though the company staged an operational turnaround a couple of years ago, it had to contend with a net loss due to a huge interest burden. The necessity to consistently expand the distribution network and the ever-increasing working capital requirement led to a mounting debt burden. This apart, the company borrowed to fund the acquisition of Calcutta Chemicals and Detergents India, earlier under Shaw Wallace's control.

As a result, Henkel had to contend with a net loss of Rs 5.87 crore for the 15-month period ended September 1999 though it managed to achieve an operating profit of about Rs 12.93 crore. The interest cost during for period stood at Rs 12.33 crore. To address this issue, the company came out with an 1:2 rights issue in 1999. Henkel mopped up Rs 166 crore through the offer. The German parent also recently picked up 56.44 lakh shares in the Indian outfit at Rs 89.15 per share. As a result, Henkel KGaA's stake has increased to 51 per cent.

The resultant cash inflow helped the company reduce its interest outgo. For the three months ended June 2000, the interest cost declined to Rs 63 lakh from Rs 2.58 crore incurred in the corresponding previous period. Its impact of the same would be fully reflected only in the performance for the six months ended December.

As a result, the company made a turn-around posting a net profit of Rs 2 crore for the six months ended June 2000. This apart, the change in the product mix and the decision to undertake job works for third parties helped Henkel SPIC stabilise its operations. The acquisition of Calcutta Chemicals and Detergents India helped the company expand its portfolio of brands. Apart from its products Henko, White Giant, Lime Shot and Pril, the acquisition helped Henkel SPIC takeover popular brands such as Chek, Margo, Neem (toothpaste), Brisk (floor cleaner and disinfectant) and Attak (mosquito repellent).

Henkel SPIC has also completed the integration of its distribution network with that of Calcutta Chemicals and Detergents India. The company is now steadily gaining presence in other parts of the country.

These factors have been reflected in the financial performance of recent years. For the six months ended June 2000, the turnover rose 44 per cent to Rs 158.07 crore, while the company posted a net profit of Rs 2 crore against a net loss of Rs 1.17 crore for the corresponding previous period.

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As for the company's future prospects, the steady rise in volumes would be a primary growth driver. The acquisition of brands helped the company gain a presence across all segments of the detergents market. It now has a presence in the detergent soap/bar segment and the detergent powder market. Even in the detergent powder segment, the company has a presence across various price points.

To sustain volume growth, the company also has the option to tap its German partner's product portfolio -- including the Fa range of toiletry and personal-care products. Thus, the German partner's increased stake (to 51 per cent) is a positive development from the long-term perspective.

The company is also taking steps to widen its geographic reach by expanding the distribution network. Henkel has now shifted its attention towards the rural market, where there is significant growth potential. This is necessary, considering that in the long term the company would have to jostle with the likes of Hindustan Lever, Nirma and Procter & Gamble to increase market share and revenue stream. The latter may be the key to its long-term fortunes, as the operation size would drive the profits. In this context, the fact that the others have a much higher scale of operations is notable and Henkel would have some way to go before catching up. The last two years' performance has been inspiring, with good growth in volumes.

From an investment perspective, the equity base of Rs 110.75 crore is the only worrying factor. However, the recent acquisitions and proceeds of the rights offer is likely to push the company into a higher growth orbit. The German parent's backing also helps the company withstand the competitive forces. Long-term investors could use price weakness to enhance exposure in the company.