Henkel Spic: Buy

Recommendation: Buy

B. Krishnakumar

A subsidiary of Henkel KgaA, Henkel Spic is gaining ground in the fast-moving consumer goods industry, with a presence in the washing powder sector.

Following the acquisition of Calcutta Chemicals and Detergents India, Henkel has a wide array of products and brands, spanning across toilet soaps, toothpastes and disinfectants. The company has also ventured into body deodorants with the launch of Fa range of products.

Henkel Spic's brand portfolio includes popular names such as Henko Stain Champion, Mr White, Margo, Neem, Brisk and Lime Shot. Aided by aggressive marketing campaign and thrust to expand the marketing network, the company has managed to gain a foothold in the highly-competitive washing detergents market.

After a robust growth during the year ended December 2000, the economic-cum-industrial slowdown affected the performance of Henkel Spic and other FMCG companies.

The necessity to provide attractive sales promotional offers and steady rise in price of soda ash and linear alkyl benzene also affected the company's profitability. This, coupled with a lack in volume growth, resulted in a relatively mediocre performance for the March 2001 quarter.

However, the company performed much better for the three-month period ended June 2001. Apart from aggressive marketing strategies, the marginal price hike has also helped the company mitigate the impact of firm trend in input costs.

For the quarter-ended June 2001, the turnover improved about 11 per cent to Rs 91.88 crore. The post-tax earnings rose 80 per cent to Rs 2.19 crore. The company has an equity capital of Rs 116.39 crore. The performance would have been even better but for the sharp rise in price of soda ash.

The disruption in operation at Tata Chemicals' soda ash plant resulted in a supply side constraint. This, coupled with a firm trend in international prices, led to a sharp rise in domestic soda ash price. However, recently, there has been some improvement in soda ash availability, which is likely to temper the recent firm price trend.

Considering that the company operates in a volume-driven industry, even marginal improvement in profitability would impact strongly on the bottomline. The company's operating parameters would improve, as and when the soda ash prices recede and settle at lower levels.

In the meantime, the company has been consistent in launching new products. The financial-cum-technical backing of the German major would help Henkel Spic fight competition. If the recent spell of monsoon translates into improved agricultural output, it would propel rural demand -- the key driver of volumes in the FMCG sector.

Taking into account these factors, there are reasons to expect an improvement in performance. Though the performance may not move up sharply, there could be a significant improvement in earnings if the industry fundamentals improve.

Considering that the company's share price has been pushed to lower levels since that the recent months, the downside risk appears rather limited from current levels. Long-term investors willing to take that extra risk could consider equity exposure in Henkel Spic.