The Real Picture -- Reckitt & Colman India

RCIL's strategy to augment growth by introducing new products and repositioning of older brands seems to have paid off, what with the 24.4 per cent growth in sales revenues in that period concluding in a 27.3 per cent rise in earnings. The scrip too looked up from its 3-year lows to a level of around Rs 278.

Nonetheless, the company's performance in the second quarter has been disappointing. Topline growth was just 10.6 per cent and the earnings growth of 32 per cent too was possible only because of a 130 per cent jump in other income.

Moreover, expenditure grew at a faster pace than sales, resulting in a rather flat (1.2 per cent) growth in operating profits. However, unlike the first quarter, advertising spend at Rs 12.28 crore this quarter wasn't significantly higher compared with the previous year's Q2.

 

While staff costs also rose marginally, it can go down in the future with RCIL's recently-announced voluntary retirement scheme.

With the premature repayment of non-convertible debentures (NCDs) of Rs 15 crore last year, the company is now almost debt-free and interest costs are, hence, negligible. However, the capex of Rs 9.8 crore for the commissioning of additional capacities for mosquito coils, PCMX and Trilcoson last year, has resulted in higher depreciation this year.

But the driver of the bottomline growth was the jump in other income to Rs 4.31 crore in the second quarter. This included a Rs 2.09 crore one-off income from the sale of certain immovable property during the quarter. Clearly, without this income (which makes up for around 35 per cent of PBT), earnings growth would have been much lower.

While the company's aim of doubling turnover may seem far-fetched going by the performance this year, RCIL's lowly valuations do merit a relook. The current market price of Rs 219 discounts the annualised first-half earnings 24 times.

RCIL can be considered as a safe long-term bet with its strong presence in some niche markets. In many of its product categories, including surface and lavatory cleaners, it competes only with the unorganised sector.

Besides, its product portfolio includes strong brands such as Robin, Mortein and the company boasts of a strong and increasing distribution network.

NRB Bearings

Quite clearly, after a memorable run last year, the general slowdown in the auto sector has affected the auto-ancillary industry. The faltering topline growth of needle bearing major NRB Bearing is confirmation of that trend.

For the first quarter this fiscal, NRB Bearings reported a topline growth of 8.1 per cent to Rs 32.56 crore compared with a topline growth of 20.42 per cent for the year ended March 2000.

With a steady rise in international prices of its main raw materials (high quality steel and steel alloys), the expenses related to consumption of material soared 58.9 per cent to Rs 10.25 crore, against Rs 6.45 crore in the previous year.

Moroever, the consumption of spares rose 35.29 per cent to Rs 3.45 crore in this fiscal. Yet, on a quarterly basis, NRB's operating profits improved considerably to 20.2 per cent, up from 18.9 per cent in the first quarter of previous year.

However, the bad news is that the sharp increase of Rs 4.35 crore in the stock-in-trade has resulted in a considerably lower total expenditure.

Overall, NRB has a healthy financial position characterised by low gearing levels and a healthy interest cover ratio of over 7 times as on March 2000.

The decline in interest outgo by 4.54 per cent to Rs 1.05 crore from 1.1 crore in the previous year reflects the company's comfortable cash flow position. Moreover, despite a considerable increase of 50 per cent in provisions for tax, NRB managed to post a net profit growth of 23 per cent to Rs 2.94 crore against Rs 2.39 crore in first quarter of FY2000.

NRB's competitive position in the bearings segment is reasonably strong with it being among the top five players. It is the established market leader in the needle and cylindrical roller bearing segment whereas others like SKF Bearings and Fag Precision Bearings are in the bulk segment of ball bearings. NRB's advantage lies in its strong research base and wide product portfolio.

Further, with the acquisition of Shriram Needle Bearing Ltd. (SNBL), the company expects to garner over 90 per cent of the fast growing domestic needle roller bearing market.

The management is believed to have worked out a comprehensive action plan to revive the ailing SNBL within next two years. In addition, the acquisition would provide the critical capacity to compete in the exports market.

Although NRB's prospects are largely dependent on the fortunes of the automobile industry, the company has worked out a strategy to iron out the fluctuations in earnings. NRB is increasing its focus on the replacement market to insulate itself from the cyclical nature of the business.

However, that is not an easy strategy to implement, and intense competition by the unorganised sector and regional players in the price elastic replacement market is likely to put further pressure on margins.

(with contributions from Mobis Philipose and Gaurav Dua)