Reiterating Procter and Gamble Hygiene and Health Care's (PGHH) strong financial performance this fiscal is the fact that net profits of Rs 56.86 crore for the 12 months ended June 30, 1999, have improved a solid 31.65 per cent compared to last year's earnings of Rs 43.19 crore. However, more interesting is perhaps the fact that the bottom line growth of 31.65 per cent for the 12-month period has been achieved on a top line growth of a mere 6.26 per cent. Profitability would have been even higher had the company not offset the Rs 10-crore revenue generated from the sale of PGHH's anti-lice treatment shampoo Mediker to Marico, against a Rs 9 crore expenditure on a VRS.

Imporantly, the bottom line growth is clearly indicative of the fact that product ranges in most FMCG companies have moved up the value scale largely through packaging innovations and focused marketing and the story at P&G is no different. In fact, it has been the effective managing of materialcosts and efficient marketing based on better consumer understanding that has helped improve operating margins at P&G for the year ended June 1999 from 16.98 per cent to 18.30 per cent.

The bottom line has further been aided by efficient tax management and stringent cost control measures. In fact, interest costs, which had risen last year, have dipped a solid 54.87 per cent from Rs 6.47 crore to Rs 2.92 crore, due to a reduction in inventory levels and prudent working capital management.

The company has also been retiring high-cost debt and analysts state that interest costs will come down further as most of P&G's capex has already been incurred and a substantial portion of its future cash flows will be used to repay borrowings. A lower effective tax rate from 19.17 per cent to 15 per cent for the nine months ended March 1999, further reflects the efficient tax management of the company. In fact, P&G is expected to have a low tax liability for another two years, largely because of the Rs 100-croreexpansion, a major part of which is being done in Goa and enjoys a 5-year income tax holiday.

However, it would be prudent to point out here that P&G's buoyant bottom line, camouflages a worrying factor for most investors, which has been the flat top line growth. A fact mirrored in the single digit revenue growth of 6.26 per cent to Rs 468.26 crore. But P&G is now trying to remedy the situation with a re-alignment of its core businesses in healthcare and feminine hygiene. The marketing tie-up with Marico for Old Spice and Clearasil should also help P&G push these two brands which had shown a decline in sales in 1997-98. P&G's ad-spend in the last year was Rs 25 crore, an expenditure well-deserved as the company has acquired a market leadership position in the feminine hygiene care market by displacing former leader Johnson & Johnson. The company has continued to upgrade and extend the Vicks franchise to products like Vicks Sinex, all of which has helped stregthen the Vicks brand as a whole.

However, oneprobable hitch to future growth could be the 100 per cent subsidiary P&G Home Products - which is owned by the parent. This, analysts state, could well lead to the parent introducing new products through this unit, reducing the importance of PGHH India. An indication of which is the termination of the manufacturing arrangement that PGHH had with the subsidiary for shampoos. In fact, it is perhaps the uncertainty associated with P&G Home Products, coupled with the flat top line revenue curve which has led to the stock underperforming the market in recent times. But given the refocus on healthcare and feminine hygiene, the stock should get a re-rating.

Indian Rayon

Indian Rayon's buy-back offer will perhaps be the first major offer to go through in the history of corporate India. The manner in which the exercise is conducted is, therefore, likely to set the trend for other forthcoming offers. The company could have chosen one of the following three methods for its buy-back offer. One, simply purchasethe 1.7 crore shares that it has decided to buy-back from the market. Two, go in for a tender offer. Three, use a book-building method. The company has chosen the third option whereas Coromandel Fertilisers, which pioneered buy-backs in India, had opted for the tender offer route.

In case of a tender offer, a company purchases shares at a pre-announced price from its existing shareholders on a proportionate basis. As this has been a method tried and tested by Coromandel Fertilisers, one would normally have expected Indian Rayon to opt for a similar route. However, Indian Rayon president & CFO Adesh Gupta says, ``We chose the book-building route as we believe it is by far the best method to carry out a buy-back. It enables all shareholders to participate in the offer, gives them some flexibility as to the minimum price they would be willing to accept and it also helps to avoid undue delays. A tender offer generally opens 30 days after the announcement whereas the book-building offer opens 7 days after theannouncement.''

Had the company opted to buy shares straight away from the markets, a number of shareholders would not have been able to participate. One of the reasons for this is that the shares have to be traded in the dematerialised form and a number of small shareholders still hold physical shares. Only shareholders who trade regularly would have really been able to take advantage of the buy-back. In this sense, the tender offer and the book-building process are better methods for a buy-back.

In order to facilitate the process, Indian Rayon will set up bidding centres in 30 cities all over the country (which incidentally is the minimum number of centres required under the buy-back regulations). These will either be Times Bank branches or MCS facilities. Shareholders will have to fill up bidding forms indicating the minimum price within the price-band of Rs 75-85, that they are willing to accept for their shares. The indicated price would have to be at Rs 2 intervals, that is, it would be one of Rs75, Rs 77, Rs 79, Rs 81, Rs 83 or Rs 85.

From the offers that the company receives it would choose those that quote the minimum price first and then proceed to the next price level till the time it gets 1.7 crore shares. In the process, if it so happens that it does not get the required 1.7 crore shares after it has fully exhausted (say) all offers upto Rs 81. But it gets far more than 1.7 crore shares if it were to accept all offers upto Rs 83. In such a case, it will accept all the offers upto Rs 81 in full. But offers at Rs 83 will be accepted pro-rata to just complete its requirement. The company will finally buy-back at the cut-off price of Rs 83 (for the above example), irrespective of the different offers by the shareholders.

FII shareholding

The idea behind limiting the foreign ownership of Indian commercial assets has some merit in it. But then, this restriction like any other also has a slightly destabilising effect on the domestic stocks, that are the target of such restrictions.Pegging the maximum FII shareholding limit at 30 per cent of the oustanding equity of a company (except banks) has created a parallel market in those stocks. For example, in cases where the FII shareholding limit has already been reached no further FII purchases can take place in the open market. Any subsequent FII purchases can only be made from another FII, and this is understandably done at a premium. That is because while the demand for these stocks continues, the supply becomes restricted only to the FIIs holding the stock, thus pushing up the price. Given that these trades have to be reported through the normal market creates a distortion in stock prices, which need not realistically reflect the parallel market action.

With contributions from Percy Dubash, Sarad Saraf & Aaron Chaze