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.
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 (Research Analyst), Managing Editor, ResearchPro 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. Madhu contributes towards our small cap service Hidden Treasure.
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