Reckitt Benckiser India: Buy

Recommendation: Buy

Aarati Krishnan

AFTER surging to the Rs-225 levels shortly after the break-up of its joint venture with Nicholas Piramal India, the Reckitt Benckiser stock has declined, in line with the broad market trends.

At the current price of Rs 196, the stock trades at a price earnings multiple of around 27 times its trailing 12-month earnings. From these levels, the stock appears to hold good potential for capital appreciation over a two-to-three-year period.

The key factors weighing in favour of the company are its strong brand portfolio, presence in low-penetration categories of the FMCG market and the possibility of a boost to its financials from Dettol and Disprin, that have now reverted to the Reckitt Benckiser portfolio.

Suitability: As an FMCG stock, Reckitt Benckiser holds potential for steady, though not high appreciation in capital over the long term. The stock is a suitable investment for those who prefer consistent and steady appreciation in value. Given the possibility of a boost to the company's performance from the return of Dettol and Disprin, investors can set a target return and book profits if the target returns are reached before the two-to-three-year period.

The brands in the company's portfolio have a dominant presence in several niche segments of the household care market. While Harpic and Mortein dominate the lavatory care and mosquito coil segments, brands such as Robin Blue fabric whitener, Cherry Blossom shoe polish, Colin glass cleaner also have significant market shares in their respective segments. Reckitt also has a presence in air fresheners (Wizard), floor cleaners (Lizol) and floor polish (Mansion).

Like most other FMCG products, a few of these segments (Robin Blue and Cherry Blossom, for instance) are facing sluggish growth rates. In fact, after a robust 16 per cent growth in sales in 2000, Reckitt Benckiser's sales growth slowed to just over 2 per cent in the first half of 2001. However, this may not be as disturbing as it seems.

Growth rates are suppressed partly because of the fact that Reckitt discontinued the sales of products to its joint venture with Nicholas Piramal. Also, most categories where Reckitt operates boasts of extremely low penetration levels. Therefore, there is considerable potential for growth in the event of a pick-up in economic and industrial growth.

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Though the extent of benefit is difficult to quantify, the recent `restructuring' of Reckitt's joint venture with Nicholas Piramal could pep up near-term financial performance. With the joint venture now wrapped up, Dettol (in its antiseptic liquid as well as toilet soap and talc variants) and Disprin have reverted back to Reckitt Benckiser. Therefore, from merely manufacturing these products for the joint venture, Reckitt Benckiser will now be back to actively marketing and distributing these brands. Dettol and Disprin are estimated to earn revenues of around Rs 225 crore and could now contribute more directly to Reckitt Benckiser's profit margins and sales.

The recent financials of Reckitt Benckiser may not inspire much confidence, since the company reported a drop in both sales and net profits for the June 2001 quarter. However, the growth in sustainable profits is quite healthy after adding back extra-ordinary items such as an additional taxation provision and VRS expenses. After adding back these items, Reckitt Benckiser India reported per share earnings of around Rs 7.20 for the trailing 12 months. Investors can consider building exposures to the stock.