Nirma: Losing lather

Backward integration has blurred Nirma's FMCG focus

The Nirma stock has slipped out of the radar screen of most fast moving consumer good (FMCG) analysts now. Of the handful of institutional investors that had a stake in the company till last year, many have exited.

As on March 31, 2004, promoters and retail investors accounted for 97 per cent of shareholding. And while foreign holding has gone up considerably on a year-on-year basis for most companies, Nirma's stands at a dismal 0.04 per cent.

The prime reason for the disinterest in the stock is that the company has, over the past few years, ceased to be a pure FMCG company. The aggressive backward integration process has led to a string of non-FMCG products such as chemicals, becoming part of the company's product portfolio.

The list includes glycerine, linear alkyl benzene, single super phosphate, soda ash, sulphuric acid and alpha olefin sulphonate. Turnover of these products amounted to over 20 per cent of sales in FY03.

There are now reports that Nirma plans to manufacture cement, which, given its current infrastructure, could generate a good IRR (internal rate of return).

It's evident that entering such businesses are not to the markets' liking, despite the prospect of a good return (IRR). The stock now trades at just 8.6 times trailing earnings, probably the lowest in the industry and akin to commodity valuations.

The only silver lining for the company from the stock market perspective is that its share price hasn't eroded much. At Rs 286 per share currently, it trades above its lows of Rs 226 hit in March last year.

But even the outlook for Nirma is not too bright. Around 70 per cent of the company's branded sales come from detergents, a segment which has seen a significant increase in competition and price wars lately.

True, Nirma is present in the low price segment (its mainstay, Nirma Detergent is priced at Rs 19 a kilo), which has been untouched, in terms of price reductions by competitors.

But better brands such as 'Tide' have become more affordable, and current Nirma users may just upgrade and split their purchase between a low priced detergent like 'Nirma' or 'Wheel' and a medium-priced one like 'Tide' or 'Rin Shakti'. Since Nirma doesn't have products in any other segment, it's sure to lose when such a churn happens at a large scale.

Already, the company's sales have slowed down considerably compared to earlier periods. Last year, consolidated revenues grew just 5.4 per cent, and profit before exceptionals and taxes grew 7.5 per cent.

But that was only because the company didn't have to pay royalty to its subsidiary anymore, after buying out the ownership of the brands 'Nirma' and 'Nima' from it in FY03. Adjusting for this, profit would be lower.

On the positive side, the company enjoys a high operating margin of 22.8 per cent, but that's offset by high depreciation charges. Net margins are much lower at 10.8 per cent. Moreover, return on capital is low at around 18 per cent.

In short, given the prospects, the increase in the proportion of commodity businesses, low floating stock and tight family ownership, the Nirma stock may continue to languish at single-digit PEs.

Risk-free safe haven

With interest rates on bank deposits barely beating inflation, risk-averse investors made a beeline for the government's so-called small savings schemes last fiscal.

These schemes attracted a record Rs 1,34,776 crore worth of investments in FY 2004, a 45 per cent jump from the Rs 93,254 crore they received in the previous year, according to RBI data.

This extraordinary rate of growth (the growth rate was a mere 14 per cent in FY 2003) is a vivid illustration of the extent to which the interest rates in small savings schemes are out of line with interest rates in the rest of the economy.

Among the schemes, post office deposits continued to be the favourite, raking in Rs 93,616 crore, a 49 per cent leap from the previous year's receipts. Receipts under NSC and other certificates amounted to Rs 38,984 crore in FY 2004, a rise of 36 per cent. PPF receipts rose by 20 per cent.

Outstandings in small savings schemes increased by 19.6 per cent in FY 2004, compared to a growth of 17.3 per cent in aggregate deposits with scheduled commercial banks.

With contributions from Mobis Philipose