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Paras acquisition: Has Marico gone overboard?

Feb 23, 2012

The recent acquisition of the personal care brands of Paras Pharmaceuticals from Reckitt Benckiser(RB) bodes well for Marico. This is because the addition of personal care products to its business not only expands its product profile but is expected to lower its reliance on pure commodities thereby improving profitability in the long run. But the price at which the acquisition was made is the key to determining whether the deal has been value accretive for shareholders or not?

Reportedly RB had paid around 8 times the sales value to acquire both the healthcare and personal care business of Paras Pharmaceuticals in December 2010. The deal price at the same valuation would be around 12 bn, considering Paras' personal care business was expected to achieve a turnover of Rs 1.5 bn in FY12.

Currently, the price to sale valuations of FMCG companies range between 1.3 to 6.7 times of their annual turnover with a majority of them trading at around four times their sales value. Therefore at realistic valuations, the deal would be valued at around Rs 6 bn to bring it in line with the valuation of an average FMCG company currently.

Valuation of FMCG companies on turnover basis
Company name Annual sales FY11/CY11
(in Rs bn)
Market Value as on 23-feb-12
(in Rs bn)
Britannia 46.1 60.8 1.3
Colgate 22.2 136.7 6.2
Dabur 40.8 180.7 4.4
Emami 12.6 57.8 4.6
GSK Consumer Healthcare 23.1 109.8 4.8
Godrej Consumer 36.5 142.7 3.9
Hindustan Unilever 196.9 829.8 4.2
Marico 31.3 97.8 3.1
Nestle 62.5 421.7 6.7
Procter & Gamble Hygiene & Healthcare 10.0 63.1 6.3
Source: Ace Equity & BSE

Marico has said that the acquisition will be funded through a mix of internal accruals, equity and debt. As on 30th September 2011, the company had cash balance of Rs 2.2 bn and investments of around Rs 1.5 bn. With a debt equity ratio of 0.7, Marico is comfortably placed to fund its acquisition at the lower band of valuation while the upper band will stretch the company's debt equity ratio above one. Since Paras acquisition is expected to add around 5% to overall sales, Marico's shareholders are expected to see EPS growth only by FY13.

Madhu Gupta

Madhu Gupta (Research Analyst), ValuePro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages.

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1 Responses to "Paras acquisition: Has Marico gone overboard?"

Dara J Kalyaniwala

Feb 28, 2012

My Log in ID is dara12@bom5.
Articles like these do not help us as investors or as students of the stock markets. You have raised a valid question. HAs Marico gone overboard in the Paras acqusiition? Though a very valid and good question is raised, you have failed to provde any answer. This question requires in-depth study and yet you pass it off in three paras and an irrelevant table. And the worst is that you do not answer your own question.

Pls avoid such sensationalism while reproting on deals.

Equitymaster requests your view! Post a comment on "Paras acquisition: Has Marico gone overboard?". Click here!

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