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Marico: Offtake remains sluggish - Views on News from Equitymaster
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Marico: Offtake remains sluggish
Feb 23, 2015

Marico Limited has announced its third quarter results for financial year 2014-15 (3QFY15). The company has reported a 21% YoY increase in sales and 18% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 21% YoY in 3QFY15 led by 26% YoY growth in domestic revenues. For 9mFY15, the topline recorded growth of 25% YoY.
  • The operating margin contracted by 0.5% YoY in 3QFY15 due to high input costs. For 9mFY15, the operating margin reduced by 0.9% YoY.
  • Net profits grew by 18% YoY on a 17.4% YoY rise in operating profit in 3QFY15. For 9mFY15, net profits grew by 16.8% YoY.
  • The company has declared a second interim dividend of Rs 1.50 per share on a face value of Rs 1 per share. The company has so far declared a dividend of Rs 2.50 per share.

(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Total income 12,007 14,524 21.0% 36,145 45,067 24.7%
Expenditure 9,989 12,155 21.7% 30,221 38,079 26.0%
Operating profit (EBDITA) 2,018 2,369 17.4% 5,923 6,988 18.0%
EBDITA margin (%) 16.8% 16.3% -0.5% 16.4% 15.5% -0.9%
Other income 180 101 -44.0% 451 401 -10.9%
Interest 73 52 -29.4% 277 173 -37.4%
Depreciation 207 235 13.3% 539 643 19.3%
Profit before tax 1,918 2,184 13.8% 5,558 6,573 18.3%
Extraordinary items - -   - -  
Tax 501 562 12.2% 1,432 1,840 28.5%
Profit after tax/(loss) 1,417 1,622 14.4% 4,125 4,733 14.7%
Minority interest 63 23   159 99  
Net profit after tax/(loss) 1,354 1,599 18.1% 3,966 4,634 16.8%
Net profit margin (%) 11.3% 11.0% -0.3% 11.0% 10.3% -0.7%
No. of shares (m)         645  
Diluted earnings per share (Rs)*         8.6  
Price to earnings ratio (x)*         41.9  
* trailing twelve month earnings

What has driven performance in 3QFY15?
  • Marico reported a 21% YoY revenue growth backed by 26% YoY growth in the domestic business and 4% YoY rise in international business. Growth in the domestic business was largely driven by price hikes taken across the portfolio to cover high input prices. The volume growth slowed down to 5% YoY for the quarter. Among product segments, Parachute's rigid portfolio posted a strong growth of 48% YoY driven largely by realizations as volumes were up by 8% YoY. The value added hair oils portfolio registered a 25% YoY growth on a volume growth of 10% YoY. However, the Saffola edible oil franchise grew by a mere 9% YoY on account of 3% growth in off take. The higher price premium relative to the other refined oils, which softened during the quarter, along with low ad-spends led to the sluggish sales. The company has taken corrective pricing action in large volume packs in January. Even the performance of the Youth brands portfolio remained subdued recording flat growth during the quarter.

  • Marico's international business recorded growth of 4% YoY with constant currency growth of 6% YoY. The growth was aided by 18% and 39% (constant currency) growths registered in Bangladesh and Middle East and North Africa (MENA). Even the South African business grew by 9% (on constant currency) during the quarter amidst challenging conditions of high inflation & interest rates, rupee depreciation, unemployment and sluggish demand. The South East Asian business grew by a relatively subdued 2% during the quarter due to economic slowdown in Vietnam. The company is scaling up its presence in Malaysia, Myanmar and Cambodia.

    Cost break-up

    As a % of sales 3QFY14 3QFY15 gain/decline in basis points
    Raw material cost 51.7% 54.5% 286.23
    Staff costs 5.7% 5.4% -26.36
    Advertisement costs 11.2% 10.5% -63.12
    Other expenditure 14.7% 13.2% -147.02

  • The operating margin remained under pressure as price of key inputs remained high. The average market price of copra, the largest raw material, was up by 34% YoY during the quarter even as sequentially it softened by 10% YoY. The price of HDPE was up by 1% YoY for the quarter. However, the price of rice bran oil and liquid paraffin were lower by 16% YoY and 17% YoY, respectively during the quarter. The raw material to sales ratio increased to 54.5% in 3QFY15 from 51.7% in 3QFY14. The impact was partially offset by savings of 1.5% and 0.6%, respectively in other expenses and ad-spends (both as a proportion of sales). The operating margin contracted by 0.5% YoY during the quarter.

  • The net profits grew by 18% YoY during the quarter. The interest charges were down by 29% YoY during the quarter. Even the other income earned fell by 44% YoY during the quarter.
What to expect?
Sales growth from rural India continues to outpace urban India. In urban India, the direct distribution initiatives of Project ONE is still to fuel volume growth in the metro markets. Going ahead, the company wants to focus on premiumization and drive growth from the bottom of the pyramid. Marico will be outsourcing order management and demand planning processes to a third party. This is expected to improve sales force and supply chain productivity and minimize distributor inventory. In the youth portfolio, Marico wants to focus on high-margin categories such as gels, serums and hair gain where the company enjoys leadership position. On the international front, expansion in adjacent markets in South East Asia and North Africa will drive growth.

At a price of Rs 359, the stock is trading at 28 times our FY17 estimated earnings. We had a given a SELL on this stock. At current price levels, the stock is overpriced. Therefore we would recommend investors not to buy the stock at current price levels.

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