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Marico: It’s a hat-trick! - Views on News from Equitymaster
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Marico: It’s a hat-trick!
Jan 19, 2007

Performance summary
Edible and hair oil major, Marico announced its results for the third quarter ended December 2006, wherein it reported a stellar topline and a decent bottomline growth. Strong all round growth across its divisions led to a 36% YoY growth in the topline for the third consecutive quarter. The company has changed its depreciation policy in 3QFY06, which has led to lower depreciation charges. The bottomline growth has been lower than the topline performance due to lower other income and higher interest cost.

Consolidated picture
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 3,005 4,092 36.2% 8,463 11,600 37.1%
Expenditure 2,531 3,534 39.6% 7,383 9,873 33.7%
Operating profit (EBDITA) 474 558 17.7% 1,080 1,726 59.9%
EBDITA margin (%) 15.8% 13.6%   12.8% 14.9%  
Other income 8 3 -56.6% 33 15 -56.3%
Interest 13 54 326.0% 27 159 481.4%
Depreciation 211 168 -20.2% 352 407 15.5%
Profit before tax 258 339 31.4% 733 1,175 60.2%
Tax 39 55 41.3% 104 327 214.0%
Profit after tax/(loss) 219 284 29.7% 629 848 34.8%
Net profit margin (%) 7.3% 6.9%   7.4% 7.3%  
No. of shares (m)** 58.0 60.9   58.0 60.9  
Diluted earnings per share (Rs)*         17.9  
Price to earnings ratio (x)*         31.7  
* 12 month trailing earnings            
**Marico had issued 2.9 m equity shares on a private placement basis through the QIP route.

What is the company’s business?
Marico is the leader in the Rs 5 bn+ branded Indian coconut hair oil market, with over 50% share (Parachute). In edible oils, the company’s brands, ‘Sweekar’ and ‘Saffola’ occupy the No. 2 position, with 13% share of the Rs 14 bn edible oil market. The company has also extended its ‘Parachute’ brand to the value added oil category (Parachute Jasmine). This brand is now No. 2 in the value-added category with a 31% market share. ‘Hair & Care’, Marico’s non-sticky hair oil brand is also No. 2 in its category. Apart from oils, Marico’s product range also includes Mediker (anti-lice shampoo and oil – 100% share), Jams (Sil – 8% share) and fabric starch (Revive – nearly 100% share).

In FY03, Marico entered the skin care-related businesses by acquiring 63% stake (currently over 75%) in ‘Sundari’ range of ayurvedic skin care products in the US (revenues US$ 1 m), as well as rolling out 27 skin care clinics under the brand ‘Kaya’. The company also recently acquired ‘Nihar’, the hair oil unit of HLL, which has an annualised turnover of Rs 1.2 bn and operates in two segments – coconut oil and perfumed oil.

What has driven performance in 3QFY07?
Franchise led growth: Franchise expansion was the key driver for a 36% YoY growth in the topline for 3QFY07 on a consolidated basis. This comprised 20% YoY organic growth accompanied by 16% YoY inorganic growth. All the business segments namely, domestic FMCG, international FMCG, Kaya Skin Solutions and Sundari recorded high growth. During the quarter, the focus brands’ turnover comprised 80% of the group turnover as against 78% in 3QFY06. Overall, the consumer products registered a growth of 29% YoY for the quarter. Besides, the company has expanded its portfolio through acquisitions, which will provide added impetus in the coming years.

Segment Revenue
  3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Consumer Products 2,721 3,503 28.7% 7,727 10,268 32.9%
% of total revenue 99.5% 99.0%   99.6% 99.1%  
Others 13 36 175.4% 33 91 173.9%
% of total revenue 0.5% 1.0%   0.4% 0.9%  
Total 2,734 3,539 29.4% 7,760 10,359 33.5%

On the domestic front, the topline has grown by 29% YoY for the quarter. The flagship brand, Parachute Coconut Oil achieved another quarter of double-digit volume growth of 11% YoY. The brand’s market share in the 12 months to November 2006 is about 48% in volume terms. Also, the focus segment of the hair-care range (Parachute Jasmine, Shanti Amla Badam and Hair & Care being the key elements) grew by 17% YoY in volume terms (excluding Nihar). In order to compensate for the increased mineral oil costs, retail prices were increased by about 5% in Parachute Jasmine, Nihar perfumed hair oil and Shanti Amla. Together with Nihar, Marico now commands 82% of the perfumed coconut oil market (12 months to Nov 2006).

Standalone
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 2,734 3,539 29.4% 7,760 10,359 33.5%
Expenditure 2,275 3,083 35.5% 6,718 8,808 31.1%
Operating profit (EBDITA) 459 456 -0.8% 1,042 1,551 48.8%
EBDITA margin (%) 16.8% 12.9%   13.4% 15.0%  
Other income 6 13 112.9% 33 26 -21.3%
Interest -4 22 -700.0% -9 108 -1351.2%
Depreciation 183 89 -51.2% 267 268 0.1%
Profit before tax 286 358 25.0% 817 1,202 47.2%
Tax 37 51 37.2% 99 315 219.1%
Profit after tax/(loss) 249 307 23.1% 718 887 23.5%
Net profit margin (%) 9.1% 8.7%   9.3% 8.6%  

In the premium refined oils market, Saffola, the company’s second flagship brand, grew its franchise by 20% in volumes. During the quarter, the company also increased the retail prices of Saffola by about 2%. The growth in value terms for the brand franchise was however similar to volume growth owing to a change in the mix of refined safflower oil and the blends. The share of the domestic business to the consolidated business fell from 91% in 3QFY06 to 86% in 3QFY07, indicating the company strong growth in its overseas business.

International operations: During 3QFY07, Marico’s International FMCG business (excluding operations in Egypt) clocked a growth of 33% YoY in revenues. Its Parachute brand has continued its good performance across various regions. Parachute coconut oil continues to be the No. 1 coconut oil in UAE with a market share of about 33.9%. In Bangladesh, Parachute has increased its share to about 57% of the branded coconut oil market. Also, the soap brands ‘Camelia’ and ‘Aromatic’ achieved a turnover of about Rs 50 m during the quarter. In September 2006, Marico had acquired Fiancee, a hair care brand, from the Ready Group. Fiancee contributed an additional Rs 120 m to the turnover during the quarter thereby, resulting in 68% YoY growth in 3QFY06 in the International business. In December 2006, Marico acquired HairCode, a leading brand in the Egyptian hair care market and with this acquisition Marico will now have a share of about 50% in the Rs 1.7 bn pre-and-post-wash hair care segment. HairCode is likely to contribute to Marico’s topline from 4QFY07. These acquisitions will further drive growth going forward.

Kaya: During 3QFY07, Kaya recorded a growth of 64%YoY. It also broke even for the quarter registering a PBT of Rs 10 m. Kaya Skin Clinic now reaches its customers through 43 clinics in India and 4 in the UAE. The Kaya consumer base has increased to over 200,000. The company expects Kaya to be PBT positive for FY07.

Consolidated cost break-up
As a % of net sales 3QFY06 3QFY07 9mFY06 9mFY07
Total Cost of goods 52.1% 53.5% 53.0% 51.5%
Staff Cost 7.8% 5.6% 7.3% 5.6%
Advertising 9.4% 12.5% 10.7% 12.7%
Other Expenditure 14.9% 14.8% 16.2% 15.3%

Brand building reduces margins: In 3QFY07, Marico’s operating margins declined by over 220 basis points (2.2%) on a consolidated basis. Even the standalone margins fell from 16.8% to 12.9% in 3QFY07. On a consolidated basis, the company’s raw material costs as a percentage of sales increased to 53.5% (52.1% in 3QFY06). Also, Marico has invested in brand building and advertising spends to strengthen its established brands and to support new ones. As a % of sales the advertising expenses have gone up to 12.5% in the quarter. While other expenditure (as a % of sales) remained constant, staff expenses reduced from 7.8% in 3QFY06 to 5.6% in this quarter.

Bottomline picture: In 3QFY07, Marico saw a decent 29.7% YoY rise in its net profits. The company has changed its depreciation policy from straight line (SLM) method to written down value (WDV) method in 3QFY07, resulting in lower depreciation charges. The company had borrowed funds for its acquisitions and as a result the interest cost rose by 326% YoY. The tax was higher in the quarter as the tax exemption on some of the manufacturing units had been exhausted.

What to expect?
At the current market price of Rs 567, the stock is trading at a price to earnings multiple of 31.7 times its trailing 12-month earnings. The board has declared an interim dividend of Rs 1.7 per share (dividend yield of 0.3%). Going forward, Marico’s strategy includes focus on growth, sustainability and profitability. Though in the quarter, the company did face margin pressure, on a long-term basis, its move to invest in brand building is expected to reap benefits. With the new acquisitions and new products, the topline is expected to remain strong. Though we are positive about the company’s growth prospects, the valuations look stretched at the current juncture.

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