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Budget effects on Marico - Views on News from Equitymaster
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  • Mar 5, 2001

    Budget effects on Marico

    As the union budget unfolded last week, it had a lot to offer to the FMCG industry. Customs duties on various products in this industry were raised. The duties for refined oils have been raised from 35% to 85% and for other oils from 35% to 75%. How will these developments affect Marico Industries?

    Marico Industries is the market leader in branded coconut oil in India. Its brand Parachute has a 53.6% market share. Its brands ‘Sweekar’ and ‘Saffola’ have a 13.1% market share of the branded refined oil market. (This data is as per ORG urban retail data for the 12-month period ended November 2000).

    Brand Category Rank in
    Parachute, Oil of Malabar Coconut Oil 1
    Revive Fabric Starch 1
    Mediker Anti Lice Shampoo 1
    Saffola, Sweekar Refined Edible Oil in consumer packs 3
    Hair & Care Non-Sticky Hair Oil 2
    SIL Jams 2

    Source: ORG urban Retail Market Research and Company Sources.

    In FY00, Marico imported around 23% of its total raw material cost (Rs 749 m). The hike in import duty therefore, will not have a major impact on Marico’s prospects. Marico expects that the hike will raise the edible oil price table in general, but it will be able to pass on most of this increase to the consumers, through corresponding price increases. However, the increase in prices may cause the growth rate of edible oil industry to slow down a little from the current level of over 20%.

    Copra and coconut oil, the other two items on which duties have been raised, are currently not freely importable. The increase in customs duty on these items will therefore not have any impact unless the EXIM policy frees their imports. Even after that happens the impact on domestic prices of coconut oil will be determined with reference to the price parity of international and Indian supplies.

    The company should not face resistance in the market for the price hike as in the calendar year 2000, Marico had cut prices of its products and passed the raw material cost benefits to the consumers.

    Particulars FY96 FY97 FY98 FY99 FY00 9 m FY01
    Sales & Services 3,486 4,097 4,900 5,512 6,483 4,793
    Profit before Tax 268 277 365 440 426 385
    Net Profit (PAT) 212 215 300 375 375 349
    Net Cash Profit (PAT + Depreciation) 238 245 340 427 452 419
    Earning per share- Annualised (Rs) 13 14 21 26 25 32
    ROCE % 46 35 41 42 33 34
    Book value Rs. per share 46 55 68 83 98 117

    On the excise duty front, since the duties on food preparations have been removed, Marico’s Sil range of products will benefit from this. According to the company’s press release the other indirect tax proposals in the budget (such as merging of the various rate slabs for excise) are not expected to have any material impact on Marico.

    The reduction of the effective tax on dividends (from 22% to 10.2%) will benefit Marico directly. Similarly, the reduction of surcharge on income tax from 13% to 2% will help Marico to reduce the tax liability further. However, the current effective tax rate for Marico is low (11.8% in FY00) and therefore the impact of the reduction in tax rates may not be sizeable.

    Against the backdrop of a general economic slowdown affecting topline growth of most FMCG companies, Marico’s key brands have shown significant volume growths. In 3QFY01, volumes of Marico’s coconut oils (Parachute and Oil of Malabar) grew by 15%, while the refined edible oils (Saffola and Sweekar) grew by 48% as compared to 3QFY00.

    At the current price of Rs 242, the stock is trading at a P/e multiple of 7.5 times its nine month FY01 annualised earnings. The valuations of the company are comparatively lower compared to its peers in the industry. Given its excellent brand portfolio and encouraging performance in 3QFY01, the stock seems in for a re-rating.



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