Research Notes

Kalina remains one of Russia's strongest cosmetics manufacturers with sales still outpacing the domestic market. However, we saw a contraction in FY05 IAS profit margins due to inordinate growth in the cost side. We revised our target price for Kalina stocks in view of emergent trends in the company's financial statement and also revised macroeconomic and sectorial indicators.

• Last year Kalina strengthened its position on the cosmetics and perfume market. In particular, the company's share of the skin care segment reached 34.9%. Kalina also scaled up its presence in the makeup segment by launching sales of the Black Pearl and Manhattan brands.

• Growth in Kalina's sales continues to overshoot the market's overall expansion rate, since in 2005 organic growth in revenue equaled 22%, whereas the domestic cosmetics market added less than 11%. The company's consolidated sales soared 58%, largely on the strength of results achieved by Dr. Scheller Cosmetics AG, which Kalina acquired in spring 2005.

• We expect to see Kalina cement its positions on the Russian and CIS cosmetics markets further down the road by selling both its own cosmetics and those of Dr. Scheller.

• Based on the company's FY05 financial statement, its profit margins slipped in all primary indicators owing to a spike in the proportion of production costs in revenue and a considerable increase in advertising and payroll expenses. Some financial indicators did not meet our forecasts and we adjusted our valuation model accordingly.

• We revised our target price and recommendation on Kalina shares in view of updated forecasts for the company's financial indicators and market forecasts as a whole.

Olga Samarets

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