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Marico: Margins grow on robust volumes - Views on News from Equitymaster

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Marico: Margins grow on robust volumes
Feb 8, 2013

Marico Limited has announced its third quarter results for financial year 2012-13 (3QFY13). The company has reported a 11% YoY growth in sales and 21.6% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • The topline grew by 11% led by 9% volume growth. For 9mFY13, revenues increased by 17%.
  • Cost savings from easing price of inputs enabled the company to invest in new launches and still garner 2.2% expansion in operating margin. During 9mFY13, operating margin appreciated by 1.9%.
  • Higher tax incidence and interest charges led to a relatively subdued 22% increase in net profits. For 9mFY13, earnings were up by 26%.

Consolidated picture
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Total income 10,524 11,678 11.0% 30,665 35,976 17.3%
Expenditure 9,265 10,020 8.2% 26,947 30,927 14.8%
Operating profit (EBDITA) 1,259 1,658 31.7% 3,718 5,049 35.8%
EBDITA margin (%) 12.0% 14.2%   12.1% 14.0%  
Other income 77 89 15.1% 247 274 10.9%
Interest 109 146 34.1% 311 462 48.6%
Depreciation 188 195 3.5% 535 613 14.6%
Profit before tax 1,039 1,406 35.3% 3,119 4,248 36.2%
Extraordinary items - -   - -  
Tax 178 360 102.3% 594 1,056 77.9%
Profit after tax/(loss) 861 1,046 21.4% 2,526 3,192 26.4%
Minority interest 20 23   52 72  
Net profit after tax/(loss) 841 1,023 21.6% 2,474 3,120 26.1%
Net profit margin (%) 8.0% 8.8%   8.1% 8.7%  
No. of shares (m)         645  
Diluted earnings per share (Rs)*         6.0  
Price to earnings ratio (x)*         36.2  

What has driven performance in 3QFY13?
  • Marico posted a 11% rise in revenues largely driven by a 9% increase in offtake. Overall business growth was propelled by a 15% rise in the domestic consumer business that included revenues of Rs 430 m from the acquired Paras brands. Among product segments, value-added hair oils posted double-digit growth of 32% on a 30% volume growth. Healthy growth in Parachute Advanced, Nihar and Hair & Care enabled the company to achieve a volume market share of 26% in this segment. In coconut oil, the rigid packs clocked a 4% growth due to a subdued volume growth of 6% mainly due to expansion in margin charged over loose oil. The company has taken price correction to restore the premium to sustainable levels.

  • The Saffola edible oil franchise grew by 10% mainly on account of higher realizations as offtake grew by a subdued 4%. Higher premium of Saffola as compared to the refined edible oils led to slowdown in the consumer uptrading. Marico has cut Saffola prices by 3%-6% in December. Marico's International Business registered a flat topline growth due to de-growth in Middle East region and loss of business days from strikes in Bangladesh. The Kaya business segment grew by 5% led by same store growth of 4% in India and Middle East.

    Cost break-up
    As a % of sales 3QFY12 3QFY13 gain/decline in basis points
    Raw material cost 52.1% 47.8% -424.97
    Staff costs 7.7% 7.7% 7.03
    Advertisement costs 12.0% 13.5% 148.00
    Other expenditure 16.2% 16.7% 46.75

  • Easing commodity prices continued to benefit the company's profitability despite some moderation in offtake. Average copra prices were 23% lower whereas market price of rice bran was down by 1% both on a YoY basis. However, safflower prices remained higher by 52% YoY. The raw material to sales ratio was down by 425 basis points (4.2%) to 47.8%. A part of the input cost savings were ploughed back into the business in the form advertisement & sales promotion. Therefore ad spends to sales ratio was up by 148 basis points. The operating margin expanded by 2.2%. The domestic consumer business reported a 1.3% increase in EBIT margins even as profitability of international business remained flat. The Kaya business booked an EBIT profit of Rs 39.3 m as compared to an EBIT loss of Rs 149.4 m in the year-ago quarter.

  • A sharp jump of over 100% in tax outgo led to a modest 22% rise in earnings even as operating profit surged by 32% during the quarter. Tax incidence rose from 17% in 3QFY13 to 26% due to higher taxable profit on account of growth in coconut oil franchise as well as de-growth in business from the tax-exempt Middle East region. The interest expense increased by 34% during the quarter.

What to expect?
Marico has displayed resilience in demand for its products despite pressures witnessed in the offtake of discretionary goods. The company has posted a robust 9% rise in volumes in December 2012 quarter. Despite making significant investments in brands and new product launches, the company has managed to improve profit margins. Marico recently reduced prices of Parachute and Saffola to plug slowdown in volume growth. As part of its restructuring exercise, the company will demerge its Kaya business into a separate company. While this is expected to reduce sales, profitability is expected to improve as the skin-care business was loss-making.

At a price of Rs 217, the stock is trading at 26 times our FY15 estimated earnings. We had a given a SELL on this stock. At current price levels, the stock remains overvalued and we re-iterate a SELL on the stock

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