Henkel SPIC: Buy

Recommendation: Buy

Aarati Krishnan

DESPITE reasonable financial performance and expected benefits from several product launches, the Henkel SPIC stock has hovered in the Rs 45-55 range for a fairly long period.

After a preferential offer earlier this year, Henkel KGaA of Germany, one of the largest chemical companies in Europe holds, a 51 per cent stake in Henkel SPIC. The preferential offer was made at Rs 89 per share. The company's fundamentals continue to inspire confidence.

The company has managed a robust topline growth of 31 per cent over the first nine months of 2000. For the nine months ended September 2000, Henkel SPIC recorded a net profit of Rs 2.73 crore against a net loss of Rs 3.96 crore in the same period last year. Sales for the period totaled Rs 229.81 crore, against Rs 175.21 crore in the corresponding previous period. The company has a presence in the mid priced and premium segments of the detergent market.

Brands such as Mr White and Henko Stain Champion have made significant inroads into the southern markets since launch and have managed to register double-digit volume growth over the past year. Improving capacity utilisation on its facilities, savings on interest costs due to retirement of debt, and a stream of successful product launches have helped the company post an operational turnaround this year.

While the company has made a success of its detergents foray, it has also been broadbasing its product portfolio through acquisitions and products drawn from its parent's pipeline. This has helped expand the business profile and enhance the company's distribution reach. The company's acquisition of Calcutta Chemicals and Detergents India Ltd _ two Shaw Wallace group companies _ last year has given Henkel SPIC access to an extensive distribution network. The company has expanded this network to expand into the eastern, then western and northern markets.

While brands such as Margo and Brisk floor cleaner (from the acquired Calcutta Chemicals and Detergents India Ltd) have helped gain a foothold in new FMCG categories, the launch of Fa deodorants, soaps and talcs, mark Henkel SPIC's foray into the personal products business. Personal products such as deodorants offer better growth opportunities than the conventional soaps and detergents business.

With Hindustan Lever being the only other major player in the business, competition is also less intense than in the soaps and detergents business. Therefore, the foray into this business is likely to pep up growth rates over the long term. The backing from the parent company in the form of export opportunities to other Henkel subsidiaries and technology for product launches is also an additional positive factor.

Since the company is in the process of adding to its product portfolio, investments in promotional efforts are likely to be on the high side over next few years. However, for investors with an investment horizon of three years or more, the stock appears to be a good addition to the portfolio at current price levels.