Reckitt & Colman: Consistent growth likely

Aarati Krishnan

WITH its focus on the urban household care market, dominant market shares in each of its businesses and a steady stream of new product launches, Reckitt & Colman of India (RCIL) appears poised to deliver consistent and healthy earnings growth over a three-year time-frame.

Transfer of key OTC pharmaceutical brands such as Dettol, Disprin and Burnol to a joint venture impacted profitability and thus stock valuation, for major part of 1999.

But after aggressive investments in new product launches and brand extensions, the company has bounced back with strong financial performance in the first nine months of 2000. At a price earnings multiple of 30 times expected earnings for 2000, the stock appears to hold potential for reasonable capital appreciation over a three-year horizon. Investors can use any decline in price from current levels to build exposures.

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Suitability: The stock would be a suitable investment for investors seeking consistent, though not spectacular, returns over a three-year horizon.

Financials: After excluding exceptional items, RCIL has reported a 24 per cent growth in net profits on a 15 per cent growth in sales for the first nine months of 2000. Operating profit margins have remained stagnant; because of a rise in material costs, staff costs and a 17 per cent hike in adspend.

While the hike in adspend can be expected to pay off in the form of better product visibility, the VRS implemented by the company in the third quarter can be expected to lead to savings in staff costs. On the equity base of Rs 32.91 crore, the per share earnings for the nine months amount to Rs 6.35 (unannualised).

Prospects: Key brands in the RCIL portfolio are Mortein mosquito repellant, Harpic lavatory cleaner, Lizol disinfectant, Robin Blue and Cherry Blossom shoe care products. Each of these brands is either the market leader or strong contender for the position; which gives RCIL considerable pricing power. While growth in mature products such as shoe care and fabric whiteners has been modest, household insecticides and disinfectants have helped RCIL sustain double digit growth rates in the recent times.

Over the past year, it has launched a slew of new products and brand extensions - Mortein red mats and coils, Wizard home fresheners, Cherry Blossom Handyshine, Robin Sunglo, and recently Calgonit dishwash products. A focus on the urban markets, low penetration levels for household care products and scope for expansion in the product basket through forays into new household care categories, make for healthy growth potential for RCIL.

The global integration of Reckitt & Colman Plc with Benckiser NV, last year has left RCIL with a larger product pipeline to draw from. In this backdrop, the company's target growth rates of 20 per cent in net profits over the next few years, appear easily attainable.