Reckitt Benckiser, a maker of cleaning products, is still sputtering. After Reckitt Benckiser said that rising costs would affect its profitability, shares fell by as much as 9 per cent on Tuesday. Laxman Narasimhan, the new Chief Executive, was elected by investors in an early vote of confidence. The strategy he had set in February last year is being undone.
Narasimhan is currently in the middle of a long, hard work of convincing investors that he can bring the Slough-based company to steady growth and increasing profitability. After fixing Reckitt’s unstable supply chains and selling the Chinese baby food business Rakesh Kapoor acquired, Narasimhan made a strong start. Covid-19 was also a success, boosting sales for disinfectants Lysol & Dettol.
The stock is still in decline. Refinitiv reports that shareholders have lost 8%, including dividends, since Narasimhan joined the company in September 2019. This compares to Nestle’s 7% gain and is in line with Unilever, an Anglo-Dutch peer. Reckitt’s current product mix, which includes condoms, disinfectants, over-the-counter medicines, condoms, and baby food, is insufficient to meet the ambitious targets he set last February.
This is made more difficult by the current inflation surge. Reckitt’s profitability is already being eroded by rising transportation and raw material costs. Reckitt’s operating margin could fall to 22.7% this fiscal year, from 23.6% in 2020. Reckitt might be able to offset this decline by increasing prices, but there is the possibility that consumers will switch products which could lead to sales falling. Narasimhan only expected revenue to increase by 0% to 2% even before the recent inflation spike.
Some relief could be offered by the flu and cold season that is rife. As lockdown is lifted and people stop using masks, the number of infections will rise. This should increase demand for Mucinex or Lemsip treatments. Investors aren’t placing their hopes on this yet. Reckitt’s shares now trade at 19x forward earnings, which is in line with peer Unilever. Reckitt had previously traded at premium prices earlier this year. This suggests that Narasimhan’s turnaround needs to be boosted.