Stock Review: NIRMA

 

Fuelled by its delisting plans, Nirma 's stock touched a 52-week high of `264.85 on Monday before ending the day with a net gain of 7.2 per cent at `240.50. However, it shed some of these gains on Tuesday, closing 2.6 per cent lower at `234.35. The company 's promoters, who currently hold 77.2 per cent in Nirma, are looking to buy out the remaining stake or 3.63 crore shares held by the public and other shareholders at a price of `235 per share. If successful, the open offer would cost the promoters `850 crore and help them acquire full control of Nirma, which has also forayed into non-FMCG businesses like chemicals, pharma and cement. However, analysts say that at current prices the stock is trading cheap .

Business performance

The company has been losing market share in its core business of detergents and soaps to players such as HUL, P&G, ITC, Godrej Consumer Products and Reckitt Benckiser. Additionally, its diversification into other nonrelated areas hasn 't borne exciting results. In FY10, while Nirma 's soaps and detergents business reported a 15 per cent decline in sales to `1,787 crore, profits increased 12.5 per cent to `420 crore. Against this, while losses in the pharma business were down by a third to `58 crore, the processed minerals segment profits fell almost three fourths to `27 crore and other businesses 'profit was down 36 per cent at `28 crore. Most of its new projects are under a gestation period, and have been a drag on overall profits. Thus, it remains to be seen how successful the company will be in setting off on a new growth trajectory.

Offer price less

Considering that Nirma 's stock has visibly underperformed the FMCG sector and Sensex in the last one year as well as the lacklustre performance in its businesses, the de-listing announcement may appear as an exit opportunity for investors. However, some analysts feel the delisting premium offered is quite less. The price of `235 offers too little premium. For the delisting to be successful, the promoters ' holding should go up to 90 per cent. HNIs hold 15 per cent stake in the company, while retail investors hold 6 per cent and 2 per cent is held by institutional investors. The delisting will fail if HNIs don 't participate. While it is up to the company to take these HNIs into confidence, investors will be happy with any price of over `300 per share.

Conclusion

While the company has diversified into various non-FMCG areas, soaps and detergents continue to dominate the financials. They formed 55 per cent of Nirma 's consolidated revenues and almost 90 per cent of profits in 2009-10. In this backdrop and considering the valuation multiples (PE as well as Price/Book value) enjoyed by the FMCG peers and applying a sizeable discount to the same, the price offered by the promoters is far lower than its intrinsic worth. Some analysts peg the enterprise value of Nirma at `6,400 crore (Rs 400 per share).

Thus, it could be worthwhile to wait for the promoters to raise the offer price to realistic levels or at least, see how the HNIs/institutional investors react to the offer.