Delist Candidate

Updated: Jul 30 2002, 05:30am hrs
Eastman Kodak Company and Kodak UK, the parent companies of Kodak (India) have made an open offer to acquire the balance 25.24 per cent stake in the Indian arm at a price of Rs 350 per share. However, the market seems to have known of the offer for over a month now.

The Kodak share price went up by almost 25 per cent to Rs 305 as on July 28, 2002 from Rs 230 as on June 26, 2002. This is quite surprising as a majority of bellweather stocks such as Hindustan Lever, Infosys, Dr. Reddy’s Laboratories etc. are trading at their 52-week low. Therefore, the Kodak scrip in a bullish mode in a bearish market gives rise to the suspicion of informed buying.

And yet the offer seems to be reasonably priced at Rs 350. This translates into a P/E ratio of around 19 comparable to that of other FMCG companies such as HLL and Nestle that have a P/E ratio of 23 and 25 respectively.

Kodak has been facing severe competitive pressure in the recent past, besides bearing the brunt of a weakening rupee. As a result, its net profit margin fell from five per cent during the year to December 2000 to 2.9 per cent during the year to December 2001.

On the other hand even the growth rate of sales declined from 18 per cent in 1999 to 10 per cent in 2001. The sales figure for the two years stood at Rs 764 crore and Rs 590 crore respectively.

The situation was no different for the quarter to March 2002, when the company reported a growth of 11 per cent in net sales to Rs 187 crore. However, cost control resulted in operating profit moving up by 25 per cent and net profit by 28 per cent respectively to Rs 9 crore and Rs 4 crore.

Since the parent companies already hold around 75 per cent stake in the Indian subsidiary, an additional 15 per cent stake will be required to get Kodak India de-listed. In that case Indian investors will have one good company fewer for investment.

MRF: MRF, the tyre major, has continued to reap benefits of a recovery in the automobile sector during the quarter to June 2002 too. India’s Rs 100 billion a year tyre industry had been hit in the past two years as vehicle sales, especially of trucks and buses, fell sharply owing to a slowdown in in the economy. The last two years were so bad for the company that its ROCE almost halved from 23 per cent to 11 per cent.

However, the company might end up the year to September 2002 with a better performance, as this is a second successive quarter to witness a near tripling of bottomline.

Topline (net of excise) moved up 9.2 per cent to Rs 479.9 crore owing mainly to higher sales volume.

Apart from higher sales of tyres, the company also benefited from the low price of its major raw material i.e. rubber.

Raw material consumption (net of stock) as a percentage of sales fell to 54.4 per cent (from 60.2 per cent). However, staff costs continue to be a concern as they went up 6.1 per cent to Rs 36.1 crore. Operating profit swelled 52.7 per cent to Rs 77.4 crore. OPM fattened by nearly five hundred basis points to 16.1 per cent (11.5 per cent). Net profit stood at Rs 29.5 crore (Rs 8.2 crore).

However, the increase in prices of major raw materials over the last few weeks is a worry for tyre industry.

Local suppliers of natural rubber have increased prices to Rs 41 a kg from Rs 26, following an international trend, while suppliers of other raw materials have also declared their intention to increase prices.

Most raw materials used in tyres — nylon tyre cord, carbon black and synthetic rubber — are petroleum by-products, whose prices rise in tandem with international crude oil prices.

The tyre companies are reluctant to pass on cost increases to customers as that may affect demand. On the other hand, their profits and profitability will be adversely impacted if they decide to absorb the raw material price increase.

Prashant Kothari & Manish Joshi