Henkel SPIC: Buy

Recommendation: Buy

Aarati Krishnan

AFTER falling to Rs 21, the stock price of Henkel SPIC India has staged a recovery of sorts to Rs 27 over the past week.

The company's earnings numbers for the quarter ended September 2001 were quite healthy, considering the sluggish conditions prevailing in the FMCG market. The company's performance in the first nine months of 2001-02 appears to confirm that it has significant growth potential, given its relatively small size.

However, given the difficult business environment prevailing in the FMCG industry, a payoff from this stock could take a three-year period. Investors willing to stay with the stock for at least three years can consider entering the stock at this price.

Henkel SPIC India, a 66 per cent subsidiary of Henkel KGaA, is a relatively recent entrant to the Indian FMCG market. Detergents are the largest contributors to the company's revenues followed by toilet soaps, talcum powders and personal grooming products. After a modest beginning with brands such as Mr White and Henko Stain Champion, Henkel SPIC has consistently expanded both its product and brand portfolio. The company has acquired brands such as Margo, Brisk, Chek and Neem and also drawn on its parent's portfolio to launch the Fa range of soaps and cosmetics and Pril dishwashing liquid. This has broadened the company' product basket (a crucial element in garnering shelf space) and reduced dependence on slow growing categories such as detergents and toilet soaps.

In the recent times, the company has had reasonable success with product launches (Fa soaps and talcs, Margo with glycerine, Henko Stain Champion). It has managed to garner a 3 per cent share of the detergent market, 3.9 per cent of the grooming products market and 1.1 per cent of the market for talcs.

The key issue for the company in the near term appears to be the slowing growth rates in key FMCG categories such as soaps and detergents. This could slow the pace of topline growth in the near term. However, with its relatively small size, managing a reasonable growth rate over the long term is probably not as much of an issue for Henkel SPIC as it is for a dominant player such as Hindustan Lever.

In the nine months ended September 2001, Henkel SPIC managed a 9 per cent growth in net sales and a 35 per cent growth in operating profits. Though this represents a distinct slowdown relative to the year 2000 (sales growth of 14 per cent), the company's sales performance is definitely superior

to that of most competitors. The company has managed to outperform market growth rates even in mature categories such as soaps and detergents.

The recent spike in the prices of inputs such as fatty acids, LAB could present a threat to profit margins. However, the impact of this will be felt in equal measure by Henkel's competitors. Moreover, with its product portfolio straddling the middle and premium end of the markets, Henkel SPIC appears to be in a better position to either absorb additional costs or pass on the higher incidence to its competitors, than players who straddle the lower end of the market.

However, with its per share earnings at less than Re.1, and the intense competitive activity in the FMCG market, it may take three to four years for the stock to deliver reasonable capital appreciation. Investors may consider booking profits in the stock once a target return of around 30 per cent is reached.