Salutary Show-Nirma

Consider this. While HLL's soaps and detergents grew at only three per cent this quarter, Godrej Soaps' consumer products division did reasonably better with a growth of around 13 per cent. But Nirma, with a topline growth of 55.4 per cent is in an altogether different league.

However, around a half of this growth comes because of the integration of the Kisan Foods business and the commissioning of the soda ash unit in March this year.

Kisan Foods had a turnover of Rs 250 crore last year and the soda ash unit is estimated to have contributed around Rs 30 crore to the topline this quarter. Adjusted for these, the sales growth of around 27 per cent is still impressive.

Of late, the consumer products industry and HLL in particular have had to contend with the downtrading trend in the market.

While this has affected HLL's performance for over a year now, it tried to counter this by laying a greater stress on the premium segment. This was done by a number of launches including Lux Sunscreen and Moisturising Formula.

Yet, quarter-on-quarter, sales growth for the division was a tepid three per cent. Godrej Soaps, too, adopted the same strategy, with the Fairness soap launch.

Nirma, on the other hand, has relied on its "value for money" strategy and has gained in the process. Its efforts at backward integration have already begun to pay off, although the new plants are not yet running at optimum levels.

Operating level margins improved over four percentage points to 22.5 per cent (18.01) this quarter. This was possible because of the decrease in the consumption of raw material. Raw material consumption as a percentage of sales dropped from around 67 per cent in the first quarter of 1999 to 64 per cent this quarter. This is expected to decrease further with the soda ash plant operating at optimum levels.

Nirma now produces both (LAB) linear alkaline benzene and soda ash, its major raw materials. Besides, it is now also self-sufficient in terms of its requirement of N-paraffin, which is used for the manufacture of LAB.

Expenses other than raw materials and staff almost doubled, though.

This would mainly be due to the its increasing spend on sales promotion. Also, interest expense reached a peak this quarter at Rs 25.25, over five times the provision for the first quarter of 1999. This is because of the full commissioning of soda ash and N-paraffin plants this year. Likewise, depreciation costs, too, saw a big jump over the previous year's figures.

Resultantly, earnings growth was relatively lower at 32.2 per cent. These earnings annualised discount the current market price of Rs 795, 23 times.

And Nirma can be expected to come up with better performances over the year. This is because of two main reasons:

===a) with the newly commissioned plants set to operate at optimum levels, operating costs can be expected to come further down

b) interest costs can be expected to come down with the company in the process of retiring its debt burden gradually.

Bajaj Auto

Bajaj Auto's first quarter results show good topline growth, riding piggyback on the 54 per cent growth in the higher value motorcycle segment. Thus, value-wise growth in sales was higher than the growth in volumes.

Yet, net profit was lower than in the first quarter of 1999-2000. And, that's in spite of higher other income.

Operating margins have been hit badly, continuing the trend towards lower margins which has been a feature of the company's results. As pointed out in the chairman's letter to shareholders, higher advertising and marketing costs, necessary to shift the company'' focus to brand building and new categories, will continue to exert pressure on margins.

There are two questions which are the keys to Bajaj's future performance. One, is the slowdown in scooter sales worsening? And two, is Bajaj increasing its market share in motorcycles?

Manindra Gupta, analyst with SBI Capital Markets points out that the answer is yes to both the questions, but that doesn't alter the fact that Bajaj's losses in scooters is not made up by gains in motorcycles.

That's because scoters still form the bulk of Bajaj's sales.

Sure, Bajaj has seen the writing on the wall and has tried to move with the times in introducing new models and shifting its focus to motorcycles. But Honda will soon be offering new competition in the scooter market, and the low price-differential between four-stroke scooters and motorcycles does not augur well for scooter demand.

While Bajaj Auto has the cash and the expertise to give its competitors a run for their money, tough times lie ahead. In the circumstances, the buyback offer at Rs 400 is a good opportunity to unlock some value for shareholders.

Emcee

(with contribution from Mobis Philipose)