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Marico: Focus pays! - Views on News from Equitymaster
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Marico: Focus pays!
Jan 28, 2008

Performance summary
  • Healthy growth across its consumer products in India, international business and Kaya skin solutions leads to Marico’s topline growth of 24% YoY in 3QFY08.
  • Consolidated operating margins remain at 12.7% in 3QFY08.

  • Higher other income and lower depreciation led to the net profit growth of 61% YoY on a consolidated basis in the quarter.

  • Standalone topline and bottomline grows by 17% YoY and 31% YoY for the quarter.

  • Marico acquired the consumer division of Enaleni Pharmaceuticals Limited (South Africa) through the purchase of 100% shares in Enaleni Pharmaceuticals Consumer Division (Pty) Ltd (EPCD) in the quarter.

Consolidated picture
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 4,092 5,062 23.7% 11,600 14,392 24.1%
Expenditure 3,583 4,421 23.4% 10,014 12,442 24.3%
Operating profit (EBDITA) 509 641 25.9% 1,586 1,949 22.9%
EBDITA margin (%) 12.4% 12.7%   13.7% 13.5%  
Other income 3 75 2181.8% 15 88 499.3%
Interest 54 68 26.2% 159 204 28.1%
Depreciation 168 107 -36.3% 407 229 -43.6%
Profit before tax 290 541 86.6% 1,034 1,604 55.0%
Extraordinary item 49 -   140 -  
Tax 55 83 51.0% 327 321 -2.0%
Minority interest 0 0     1  
Profit after tax/(loss) 284 458 61.3% 848 1,283 51.4%
Net profit margin (%) 6.9% 9.0% 7.3% 8.9%
No. of shares (m) 609.0 609.0 609.0 609.0  
Diluted earnings per share (Rs)*       2.6
Price to earnings ratio (x)*     23.8
* 12 month trailing earnings

What has driven performance in 3QFY08?
  • 19% YoY organic growth accompanied by 5% YoY inorganic growth led to the consolidated topline growth of 24% YoY in 3QFY08. The consumer division grew by 24% YoY in 3QFY08, with Parachute Coconut Oil growing by 11% YoY in volume terms. Marico continues to dominate the category with a 56% market share. The focus segment of the hair-care range (Parachute Jasmine, Parachute Advanced, Shanti Amla Badam, Nihar Naturals and Hair & Care) grew by 31% YoY in volume. Saffola maintained its double-digit franchise growth with a 19% YoY jump in volumes led by higher growth in Saffola Gold.

    Segment Revenue
      3QFY07 3QFY08 Change
    FMCG 11,012 13,601 23.5%
    % of total revenue 94.9% 94.5%  
    Others 588 791 34.5%
    % of total revenue 5.1% 5.5%  
    Total 11,600 14,392 24.1%

  • Robust performance across all geographies has enabled the international business to show healthy growth with contribution of 17% to the topline. Marico entered the fast growing South African ethnic hair care and health care market through the acquisition of Enaleni Pharmaceuticals Consumer Division Pty (EPCD). The Durban-based EPCD is present across segments such as Hair Relaxers, After Care-Hair Food and Hair Conditioners with annualised turnover of about Rs 530 m. Its brands are ‘Caivil’ (in the premium ethnic hair care, ‘Black Chic’ (in VFM hair care) and ‘Hercules’ (in OTC Health Care). Enaleni along with ‘Fiancee’ and ‘HairCode’, (the brands acquired in Egypt last year), grew by 49% YoY during the quarter. The robust performance in Bangladesh continues with Parachute coconut oil’s market share touching 65% during the 12 months ended November ’07.

  • Kaya’s Revenues during 3QFY08 witnessed a growth of 30% YoY. It added 3 clinics in India, one each in Mumbai, Bangalore and Nagpur. Two new clinics were added in the Middle East during the quarter, Ras al-Khaimah in UAE and Riyadh in Saudi Arabia. Kaya now has 56 clinics, including 8 in the Middle East. The skin care solutions business of Kaya Skin Care broke even during FY07 with a marginal profit before tax. Kaya Skin Renewal which was launched in the previous quarter was rolled out nationally.

  • While raw material and advertising cost fell as a % of sales, staff and other expenses increased as a % of sales leading to the margin remaining stable at 12.7% in 3QFY08. A combination of lower Copra prices and the 3% price hike effected in July 2007 in ‘Parachute’ aided the expansion. Copra prices corrected about 10 to 12% on a YoY basis. Input costs of other edible oils however continued to show an increasing trend and were higher during the quarter on y-o-y basis viz. sunflower oil (~ 20%), safflower (~ 30%), corn oil (~ 20%) and rice bran oil (~ 20%). Consumer product division witnessed margin improvement of 1% YoY. Continued Rupee appreciation against the US$, did put some pressure on the International Business margins and growth in rupee terms.

  • Higher other income and lower depreciation (change in depreciation method) led to the net profit growth of 61% YoY on the consolidated basis in the quarter. The tax rate also came in lower from 19% in 3QFY07 to 15% in the quarter. Excluding the effects of depreciation, acquisition costs, foreign exchange transactions, the net profit has grown by 26% YoY. On standalone basis, the bottomline grew by 31% YoY in 3QFY08, contributing 88% to the consolidated bottomline (down from 108% in 3QFY07) indicating faster growth of its international operations.

What to expect?
At the current market price of Rs 61, the stock is trading at a price to earnings multiple of 16.1 times our FY10 estimates. While margins are in line with our expectations, the company has outperformed our sales estimates. All the businesses demonstrated strong volume and revenue growth during the quarter. The focus on growth and building new brands and strengthening existing ones continue to reap good results. The management expects to be able to maintain a growth rate of over 20% during FY08. In the short run, the company would focus upon gaining insights about the Egyptian consumers and markets and build upon the business in Egypt. It could also explore increasing exports from Egypt into neighboring countries. Also the expansion plans of Kaya would continue. Though increase on input price would put pressure on the margins, it enjoys significant brand equity. With strong portfolio, wide reach across geographies and expectations of strong inorganic growth, we expect the performance to remain strong.

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