BPL LtdThe third quarter results of BPL Ltd would at first sight indicate that the company is performing exceptionally well. The profit for the nine-month period ended December 1997 was 36 per cent higher than the profit for 1996-97. The profit in the third quarter itself is equal to the profit in the first half of 1997-98. However, the basic question is what is the return on capital employed? According to the management RoCE is 14 per cent for the period ending December 1997. The method of calculating it seems to be EBIT-Other income/Average total capital employed. Firstly, even with a debt:equity ratio of 1.15:1 (calculated on the basis of figures given by company), the RoCE of 14.2 per cent is lower than cost of capital that is value is being destroyed. Second, between 1992 and 1997, incremental RoCE works out to be just 7.05 per cent. The capital employed between 1995 and 1997 has gone up from Rs 295.12 crore to Rs 676.95 crore and PAT has remained flat-Rs 48.39 crore in 1995 and Rs 48.47 crorein 1997. Clearly, the focus is on building assets than on returns--this is reflected in a price-earnings ratio of just 4.
Assuming that in the last quarter of the year, BPL manages to post the same sale as in the first half and improves its operating profit margin and interest cover to 9 per cent and 4.5 times respectively, on a debt:equity of 1.15:1 (pay-out:25 per cent), RoCE works out to be 18.5 per cent. The weighted average cost of capital for 1997-98 would be around 16.7 per cent. But in the third quarter the margin has remained flat at 8 per cent and sales has been 71 per cent of first half. An optimistic conclusion could be that company will just about create value. Despite the rate at which BPL is growing, the proposed restructuring in the group will inflate its balance-sheet size. The direct result will be that margin of safety (RoCE-WACC) will not improve. The shift from value destruction to marginal value creation does not call for any enthusiasm by the market.
SKB ConsumerHealthcare
Smithkline Beecham Consumer Healthcare's annual results have shown how royalty payments can adversely affect the profit margins of the company. The 5 per cent royalty on sales for the brand Horlicks, has meant that the company had to pay a minimum of Rs 20 crore, (assuming reported turnover of Horlicks alone is 75 per cent of the company's turnover). The royalty payment works out to 22 per cent of the profit before tax. The increase of price of malt, a major raw material, in the second half has also put strains on the bottomline.
By transferring Crocin to SKB's 100 per cent subsidiary, the company has benefited by the one-off payment, which is similar to the payment that the company had received last year after transferring ENO brand to the 100 per cent subsidiary. Ironically last year, the brand transfer, along with the sales of the discontinued product had helped the company post 35 per cent increase in turnover, while this year the increase is only 13.6 per cent. The transfer of brandshas resulted in company maintaining a solid cash balance for the second successive year. But what is surprising is that the company has been using cash to retire debt at a time when debt equity ratio is lower than 0.2. Inspite of the fact that company has not used interest payments to offset tax, the company got the benefit of lowering of tax rate from 43 per cent to 35 per cent. So even though the profit before tax rose from Rs 79 crore to Rs 94 crore, the tax paid by the company remained at Rs 32 crore. What remains to be seen is whether, the 100 per cent of Smithkline Beecham starts manufacturing Horlicks. If it does, the company might in future be relegated only to being a trading unit of the parent company. The market already has discounted this factor and hence the company trades in lower P/Es compared to Cadbury and Nestle. In any case, if the merger with Glaxo materialises, it will be a whole new ballgame.
Silver
The announcement of Warren Buffet, the Berkshire-based billionaire investorbuying around 20 per cent of world's silver stocks over the last six months sent silver prices zooming on the domestic market over the last couple of days. Buffet had purchased 129.7 million ounces, accumulating a stake worth around $900 million, through his Berkshire Hathaway Corp over six months. Further the closing of copper mines in Columbia and Canada, where silver was produced as a by product has further fuelled the rise in price. The present 14 per cent rise in the price may further go up as the overseas market is already in a speculative stranglehold. The effect of the rise in prices would be most severely felt by the photographic film manufacturers, who consume 45-50 per cent of the total silver production in Japan. However, some of the companies had bought in excess supply last year, when the price was below $ 4.5 per ounce. Today, when the price is ruling at $7.05, these companies are unlikely to make a buy decision.
In India the major bulk consumers are in photography, electrical andelectronics, zari threads, foils for sweet and gutka/panmasala industry and jewellers. These consumers are unlikely to make purchases at this price. The global stock of silver is estimated to be around 109,000 tonnes. With rise in population, industrial use and `elite' demand for silver utensils, jewellery and coins, the overall demand for silver has risen considerably over the last couple of years.
(with contributions by Urmik Chhaya, Manish Saxena and Percy Dubash)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
