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Marico: Input cost pressures ease - Views on News from Equitymaster
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Marico: Input cost pressures ease
Feb 3, 2012

Marico Limited has announced its third quarter results for financial year 2011-12 (3QFY12). The company has reported a 29.4% YoY and 20.9% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales increased by 29.4% YoY led by a 30% growth in turnover from consumer care business. During 9mFY12, sales grew by 29.4% YoY.
  • High advertisement and staff costs depressed operating margins that were down by 70 basis points YoY during the quarter. For 9mFY12, operating margin was down by 100 basis points YoY.
  • Earnings grew by 20.9% on a 22% rise in operating income and a 33.8% increase in other income. The tax outgo increased by 33.4% YoY during the quarter. Due to steep jumps of over 25% in each of the interest and tax expenses, net profits grew at a relatively slower 15.2% in 9mFY12.

Consolidated picture
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 8,177 10,578 29.4% 23,810 30,809 29.4%
Expenditure 7,180 9,361 30.4% 20,765 27,174 30.9%
Operating profit (EBDITA) 997 1,217 22.1% 3,044 3,635 19.4%
EBDITA margin (%) 12.2% 11.5%   12.8% 11.8%  
Other income 69 92 33.8% 185 289 56.1%
Interest 76 83 7.9% 211 270 27.7%
Depreciation 146 188 28.8% 406 535 31.6%
Profit before tax 843 1,039 23.2% 2,612 3,119 19.4%
Extraordinary items - -   - -  
Tax 133 178 33.4% 422 594 40.8%
Profit after tax/(loss) 710 861 21.3% 2,190 2,526 15.3%
Minority interest 14 20   42 52  
Net profit after tax/(loss) 695 841 20.9% 2,148 2,474 15.2%
Net profit margin (%) 8.5% 7.9%   9.0% 8.0%  
No. of shares (m)         615  
Diluted earnings per share (Rs)*         5.1  
Price to earnings ratio (x)*         32.1  
* trailing twelve month earnings

What has driven performance in 3QFY12?
  • Marico recorded a 29.4% rise in revenues led by 16% volume growth in the domestic consumer products business. Overall growth was broad-based and witnessed across all the three business units. Domestic consumer business, which contributes more than 60% to consolidated sales, saw a strong traction of 38% driven by double-digit volume growth in both Parachute coconut oil and other value-added oils. The Saffola Oil franchise clocked robust turnover aided by 15% volume growth and 9% price-hike. The International business with around 22% sales share grew by 39% YoY boosted by the International Products acquisition. Not to be left behind, even its specialized skin-care business Kaya business reported same store collection growth of 15% during the quarter.

    Cost break-up
    As a % of sales 3QFY11 3QFY12 gain/decline in basis points
    Raw material cost 52.7% 51.5% -113.76
    Staff costs 6.8% 7.6% 83.44
    Advertisement costs 11.0% 12.7% 164.10
    Other expenditure 17.3% 16.7% -65.54

  • Marico has been able to tide over inflationary pressures faced in 3QFY12. The company would have actually expanded margins had it not been for the accounting of prior-year misstatement of expenses amounting to Rs 129.7 m of its Kaya Middle East subsidiary that were charged to the respective operating cost heads during the quarter. The steep commodity inflation sobered down considerably with copra prices falling by 9% sequentially even as they continued to hover 4% higher on a YoY basis. The prices of the other inputs were passed on to the consumers during the quarter. The ratio of COGS to sales fell by 114 basis points to 51.5% in 3QFY12 and was considerably lower than 54.7% recorded in 2QFY12. However the proportion of staff costs and advertisement expenses in sales were up by 83 basis points and 164 basis points respectively. In terms of business segments, the EBIT margin of consumer care expanded by 120 basis points to 12%. However overall margin was dragged down by loss of Rs 144.3 m incurred at the EBIT level by the skin care business. This segment had clocked EBIT margin of 9% in the year-ago quarter.

  • The robust topline growth has percolated into a moderate 21% rise in earnings on account of a jump in depreciation and tax outgo. The depreciation charges were up by 28.8% YoY as it included amortisation expense of Rs. 26.6 m against intangible assets of its overseas subsidiaries. The company began factoring amortisation since the March 2011 quarter. Even tax expenses net of of write back of excess provision of Rs55.6 m relating to previous year was higher by 33.4%. The impact of higher costs was partially offset by a 33.8% rise in the other income earned by the company during the quarter.

What to expect?
At a price of Rs 164, the stock is trading at 24.8 times our FY14 estimated earnings.

Marico has been growing at a robust pace but its margins were shrinking on account of high commodity prices. The company has not hiked coconut oil prices since H2FY11 to maintain market shares. Backed by strong brand equity, brisk offtake and easing raw material prices, input cost pressures have reduced in 3QFY12. However on account of extraordinary prior-period expenses charged, the company fell short of margin expansion during the quarter. We will update the future growth prospects of the stock after the company management meet. However, at current valuations the stock appears expensive.

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