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Marico: Offtake remains tepid - Views on News from Equitymaster
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Marico: Offtake remains tepid
Feb 12, 2014

Marico Limited has announced its third quarter results for financial year 2013-14 (3QFY14). The company has reported a 3% YoY increase in sales and 32% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Topline increased by a tepid 2.8% YoY in 3QFY14 due to demerger of the Kaya business. For 1HFY14, revenues grew by a mere 0.5% YoY.
  • However, operating margin improved by 2.7% YoY in 3QFY14 due to lower ad-spends, staff costs and other expenses. For 9mFY14, the operating margin expanded by 2.4% YoY.
  • Backed by a jump in the other income earned as well as reduction in interest charges, net profits grew by 32% YoY in 3QFY14. During 9mFY14, net profits were up by 29% YoY.
  • The company has declared an interim dividend of Re 1 per share of face value of Re 1 each.

Consolidated picture
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Total income 11,678 12,007 2.8% 35,976 36,145 0.5%
Expenditure 10,026 9,989 -0.4% 30,933 30,221 -2.3%
Operating profit (EBDITA) 1,652 2,018 22.2% 5,043 5,923 17.5%
EBDITA margin (%) 14.1% 16.8% 2.7% 14.0% 16.4% 2.4%
Other income 89 180 102.2% 274 451 64.7%
Interest 140 73 -47.9% 456 277 -39.2%
Depreciation 195 207 6.2% 613 539 -12.0%
Profit before tax 1,406 1,918 36.4% 4,248 5,558 30.8%
Extraordinary items - -   - -  
Tax 360 501 39.1% 1,056 1,432 35.6%
Profit after tax/(loss) 1,046 1,417 35.5% 3,192 4,126 29.2%
Minority interest 23 63   72 159  
Net profit after tax/(loss) 1,023 1,354 32.3% 3,120 3,966 27.1%
Net profit margin (%) 8.8% 11.3% 2.5% 8.7% 11.0% 2.3%
No. of shares (m)         645  
Diluted earnings per share (Rs)*         7.9  
Price to earnings ratio (x)*         27.3  
* trailing twelve month earnings

What has driven performance in 3QFY14?
  • With the demerger of the Kaya business effective April 2013, the company's topline has grown by a mere 2.8% YoY. Excluding the impact of demerger, revenues have grown by 10% YoY backed by 9% YoY growth in the domestic FMCG business and 15% YoY increase in the international business. In the domestic market, that contributes 76% to overall sales, growth was largely led by price-hikes as offtake grew by 3% YoY during the quarter. Among product segments, Parachute recorded growth of 6% from higher realizations. The Saffola refined edible oils franchise grew by 7% YoY led by strong volume growth of 9% YoY. The value-added hair oil portfolio grew by a robust 16% YoY aided by higher volumes and better realizations. The acquired portfolio of Paras brands grew by 13% YoY to Rs 480 m during the quarter. Marico forayed into the hair colour market by launching Livon Conditioning Cream Colour. The company introduced Bio Oil, a product to improve scars and stretch marks, during the quarter in partnership with South Africa-based Company Union Swiss.

  • Marico's international business grew by 15% YoY in value terms led by 12% favourable exchange rate movement. The overall volume growth remained poor at a mere 1% YoY. Amidst political uncertainty in the run-up to elections, topline in the largest market Bangladesh declined by 14% (constant currency) during the quarter. Revenues in Middle East and North Africa grew by 10% YoY aided by strong growth of 22% YoY in Egypt whereas business in South East Asia mainly comprising of Veitnam saw a 24% YoY jump. However, revenues in South Africa grew by tepid 5% YoY on account of economic slowdown.

    Cost break-up
    As a % of sales 3QFY13 3QFY14 gain/decline in basis points
    Raw material cost 47.8% 51.7% 389.00
    Staff costs 7.5% 5.7% -187.23
    Advertisement costs 13.5% 11.2% -234.75
    Other expenditure 17.0% 14.7% -233.03

  • Backed by savings in staff costs, ad-spends and other expenses, Marico has been able to offset higher input costs. During the quarter, prices of copra and rice bran oil were higher by 78% and 6% on a YoY basis respectively whereas the price of safflower oil was lower by 26% YoY. Resultantly, raw material-to-sales ratio surged by 3.9% YoY during the quarter.

  • However, each of the ad-spends and other expenses (both as a proportion of sales) were lower by 2.3% YoY . The savings in other expenses has been on account of shifting of crushing from third party operators to own factory in Bangladesh. Even the staff costs to sales ratio was down by 1.9% YoY. The operating margin expanded by 2.7% YoY during the quarter. In the domestic market, operating margins earned were 18.7% as compared to margins of 18.1% in the international market.

  • Net profits saw a jump of 32% YoY on the back of a sharp fall in interest charges and higher other income earned during the quarter.
What to expect?

Marico has been impacted by slowdown in offtake both in the domestic and overseas markets. During 9mFY14, domestic business grew by a mere 6% whereas international operations grew by 15% with a large part of the growth accruing from favourable currency movements. Its largest overseas market Bangladesh, contributing over 40% of overseas sales, has been reeling under high inflation, slow consumer spending and shutdowns. Even its South African market has been hit by slow economic growth. The company is trying to mitigate pressure by entering value-added hair product categories.

At a price of Rs 216, the stock is trading at 22 times our FY16 estimated earnings. We had a given a SELL on this stock. At current price levels, the stock does not provide adequate margin of safety. Therefore we re-iterate a SELL on the stock.

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