With A Pinch Of Salt

Is Corn Products stretching itself too far in its proposed acquisition of DCW Home Products' branded iodised salt business along with the `Captain Cook' brand? Quantifying the pros and cons in financial terms can be possible only when the details of the deal are announced.

Some analysts feel current valuation itself is too expensive. The stock was trading at about Rs 150-160 when the company was in the red but shot up to about Rs 200-230 on expectations of good first quarter results.

The company did not disappoint achieving a profit of Rs 1.66 crore in the first quarter.

Analysts caution that the rest of the year may not necessarily see the same results, and a discounting of 19 times for Corn Products is on the higher side.

Whether the acquisition of the `Captain Cook' brand and entry in to branded salt changes this remains to be seen. The primary intention of any such acquisition is to enhance its top line growth. The branded salt market is estimated at about Rs 280-300 crore.

Reports say that the Gandhidham plant is to be acquired. This plant which was commissioned in 1996-97 has a capacity of one lakh tpa of refined iodised salt.

If we assume that the plant is functioning at 70 per cent capacity and per kg price of branded salt as Rs 4, it would result in an addition of about Rs 28 crore to its sales. 1997-98 sales stand at Rs 39.24 crore and this addition to it would transform its top line altogether.

But this growth will come at a cost, namely that paid to DCW. Moreover, it changes the nature of its product portfolio. Analysts say that the company which has primarily been in a high value-low volume business is venturing in to branded staples, which is a low margin-high volume business.

A concern is if it can successfully attain this transformation and if margins' growth will sustain. However, Corn Products' distribution network will be strengthened post-acquisition, which will help its existing product portfolio of soups, jellies and other processed foods grow.

Again, margins themselves may not be attractive, which has probably prompted DCW to put the business on sale. According to one analyst, gross margins are quite attractive in the business. Once a company has its technology and logistics in place, the going is steady. Here, it has an advantage in that it is acquiring a runningplant and optimum capacity utilisation is not a problem..

However, breaking even after spending on promotion is a difficult task. Though the brand is well established, this segment requires constant support. Breaking even is where Corn Products will face a challenge _ to turn around the business at the earliest.