Nirma Industries: Cost pressure

Backward integration hasn't paid off for Nirma Industries

Nirma Industries has seen a 49 per cent rise in its stock price in the past one year, a period during which the detergents industry has grappled with both price and cost pressure.

Nirma has mainly had to deal only with cost pressures, since it's present in the mass market segment, which didn't see any price cuts. But the fact that mid-priced detergents got even cheaper could have resulted in some migration and hit Nirma's volume growth.

Nirma's topline, which is split between branded FMCG products and chemicals such as linear alkyl benzene and soda ash, grew by just 5.5 per cent in FY05. Things get worse further down in the income statement, what with the company reporting a 8.1 per cent drop in operating profit. Operating margin fell by as much as 400 basis points, owing to a 630 basis points rise in raw material cost. Input costs for detergents and soaps had risen sharply last year.

Nirma had taken a price increase of about five per cent earlier this year, according to analysts, the benefits of which will accrue only this fiscal. Nirma's strategy to invest significantly in backward integration hasn't paid off, going by the fact that its raw material cost pressures have been as bad as the rest of the industry.

Given the pressure on margins and drop in profit, it's interesting that the Nirma stock has risen 49 per cent in the past year, almost in line with the 55.5 per cent rise in BSE's FMCG index.

But a look a the stock's performance prior to that suggests that it may just be a case of Nirma catching up with the rest. At current levels, the stock trades at less than 12 times trailing earnings, which still makes it among the cheapest FMCG stocks.

A fair ratio

The merger of Bank of Punjab (BoP) with Centurion Bank couldn't have been better timed especially for BoP which has posted a loss of Rs 73.2 crore for the quarter ended March FY05 and a loss of Rs 61.2 crore for FY05.

The swap ratio, by which every four shares of Bank of Punjab, will fetch shareholders nine shares of Centurion Bank, is primarily a reflection of their respective book values. With a net worth of Rs 185 crore as of March 05, the book value per share for BoP is around Rs 17.60 while for Centurion Bank with a net worth of Rs 511 crore, it is Rs 5.04.

That gives a ratio of 3.5 shares of Centurion Bank for each share of Bank of Punjab "" that's against the announced ratio of 2.25 shares of Centurion Bank for every Bank of Punjab share, which is what the market expected.

The difference, of course, is in favour of Centurion Bank, and that's probably because of the perception that while Centurion Bank has cleaned up its balance sheet and pumped in capital into the business in the past year, Bank of Punjab has been going downhill.

However, BoP's fourth quarter and FY 05 loss have been primarily due to lower interest on investment. It has seen a huge drop in the interest earned on investments to Rs 108.9 crore in FY05, a fall of 26 per cent y-o-y. The income from fees too plunged 48 per cent to Rs 69 crore.

The combined (pro forma) capital adequacy of the merged entity works out to Rs 16.1 per cent. In terms of sheer numbers, BoP's net interest margin at 4 per cent is, however, far lower than Centurion's at 5.8 per cent.

PSL Ltd

PSL Ltd has reported a 43.47 per cent growth in its earnings before exceptional items and tax to Rs 17.82 crore in the March quarter, despite net sales expanding 120 per cent to Rs 570.09 crore.

Like earlier quarters, rising input cost ,principally that of steel, has resulted in profits lagging sales growth "" for instance, in the March quarter, the overhead consumption of raw material has jumped 130 per cent to Rs 446.76 crore.

As a percentage of net sales, it rose 366 basis points to 78.36 per cent. This metric had , however, risen 1897 basis points to 88.91 per cent in the first nine months of FY05.

PSL manufactures specialised pipes like spirally welded steel pipes, and exports form a significant portion of the company's total turnover. In the domestic market, key customers include projects of state governments to expand water supply networks and pipeline expansion projects of oil companies.

While a larger turnover helped operating profit grow 70.87 per cent to Rs 35.15 crore in the March quarter, operating profit margin basis slipped 178 basis points to 6.16 per cent. These concerns have led to the stock advancing only about 2.6 per cent as compared to an eight per cent gain in the Sensex over the last one month.

The company has bagged several orders in recent times with the latest being HPCL's pipe supply order valued at approximately Rs 255 crore and it should strengthen the order book position which was valued at about Rs 1,000 crore at the end of FY05.

Going forward, with global steel prices continuing to ease and with expectations of another price cut in domestic markets too, a pick up in the company's operating margins looks increasingly likely.

With contributions by Mobis Philipose, Shobhana Subramanian and Amriteshwar Mathur