Kalina Concern, which is Russia’s major manufacturer of perfumery and cosmetics, published 2003 financial results under US GAAP last week. It is believed in the company that the past year had been very successful: the concern’s net profit grew by 72.9 percent to $10.8m, and its revenues rose by 30.4 percent to $157.1m. Kalina hopes that these results will allow the company to successfully conduct an IPO. However, some experts doubt the success of this initiative: whatever efforts the company makes to put its finances in order, it will be uneasy for it to persuade foreign investors that the Russian perfumery industry, in comparison with, for example, the oil industry, has any chances of competing with foreign companies.

Kalina Concern is one of the leading Russian manufacturers of cosmetics and perfumery. The company’s sales volume has reached $157m. Major shareholders in the company are its chief executive Timur Goryayev (who has a 66.04-percent stake in the company’s authorized capital) and the European Bank for Reconstruction and Development (19.23 percent). The company makes skin care products under the Chyorny Zhemchug (Black Pearls) and Zolotaya Liniya (Golden Line) brand names, as well as dental care products under the “32” brand name, etc. Kalina estimates its shares of the Russian skin care and dental care markets of 33 percent and 17 percent respectively. According to the UFG investment company, household chemical goods make up 5 percent of the concern’s total volume of sales.

Kalina says the publication of the financial statement under international standards is a “step” on the way to a public offering of shares at MICEX. As long ago as at the beginning of 2002, Kalina Concern announced plans to conduct a public offering of its securities on an international exchange. Yet, following active promotion of this event during the whole year of 2002, the IPO has not finally been conducted. Khalid Dianov of the Corporate Finance Department of ATON Capital linked this outcome to the fact that the company’s value practically had not increased since a drastic rise in Kalina’s sales in 1999-2001. Nevertheless, an IPO seems to have become an idee fixe for Kalina, and it has been decided to conduct in Russia the public placement that failed abroad earlier. A source in Kalina explained to RBC Daily that a public offering for the company was a way to create a sufficient free float. “This would become a useful market indicator and would be a good continuation of our credit history. Initially, we obtained bank loans, then we issued two series of bonds, and therefore, an offering on MICEX would be a logical extension of this chain,” the source in Kalina pointed out.

However, this initiative did not succeed at the end of last year either. The management of the company announced its plans to enter the exchange as soon as in 2004. In the opinion of Alexey Krivoshapko of UFG, Kalina’s refusal to conduct a public offering last year was, in fact, justified. “Everything that deals with an offering of shares is determined by the stock market, and in general, the situation there was far from ideal in December,” he told RBC Daily.

However, the situation on the stock market is just an official pretext for postponing the IPO. The problem is that some financial results of the company cause serious questions. First of all, the fact that sales revenues are growing much slower than “commercial and general business costs” causes some concern. For example, the company’s costs grew by over 30 percent last year, compared to those of 2002, while its revenues also increased by 30 percent. In theory, this situation could be due to low efficiency of business management. “Kalina owns a lot of different brands, and in a way, it is facing the same problems as Wimm-Bill-Dann (WBD). A broad range of trademarks supports a rise in sales but at the same time it leads to a decrease in the profit margin,” Alexander Kuzmichyov, an expert of the BKG consulting company, told RBC Daily. In terms of efficiency of the company, there is another worrisome issue: Kalina’s undistributed profit is growing steadily. While it amounted to $33.3m in 2002, the corresponding figure grew to a level as high as $45.7m last year. Therefore, the company is simply “freezing” its capital, and in the end, this prevents its dynamic development.

However, in the opinion of independent experts, Kalina, which plans to conduct an IPO as soon as next week, is so far unable to suggest an “idea” for potential investors: in the view of foreigners, Russian cosmetics look absolutely unintelligible to foreigners, in contrast to, for example, the production of raw materials. Remarkably, the Russian chain of pharmacies “36.6” was unable to conduct a successful IPO on MICEX last year for this particular reason, and as a result, the company placed its shares at a price that was lower than the initial estimate almost by half. Additionally, it should be noted that western perfumery companies are actively advancing on the Russian market now. “The ratio between Russian and imported perfumery products was 47 percent by 53 percent last year. We forecast that this ratio will be changing towards an increase in the market share of imported products,” Andrey Maslak, the president of the Staraya Krepost ExpoMediaGroup told RBC Daily. Additionally, it should be noted that foreigners spend huge money on advertising. For example, the problem of the international holding company LVMH is that it is ready to spend such a sum on advertising that it exceeds the physical capacity of the Russian media, Timothy McCutcheon, an analyst of ATON Capital, told RBC Daily.

Some experts also remark on the fact that in principle, Kalina does not need an IPO. It is planned to allocate over a half of all funds to be received (65 percent) for the purchasing of new trademarks, which Kalina has a plenty of already. The company has no clear plans for extending its production capacity, and therefore, one should not expect a substantial rise in the concern’s revenues. Additionally, the amount of undistributed profit and an unused loan of $20m, received from the EBRD at the beginning of 2003, rather indicate the contrary: Kalina’s management does not know where to allocate the funds to be received and how to develop the company, and an IPO would not help it here.