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Marico: Robustness continues - Views on News from Equitymaster

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Marico: Robustness continues
Apr 24, 2008

Performance summary
  • Marico continues to post impressive growth YoY on account of its brands, new launches and international acquisitions.
  • 17% YoY organic growth accompanied by 5% YoY inorganic growth leads to the topline growth of 22.5% YoY for the full year.

  • Consolidated operating margins remain stable at 12.9% in FY08.

  • Excluding the extraordinaries, the bottomline on the consolidated and domestic front grew by 27% YoY and 39% YoY respectively for the year.

  • The company divested the ‘Sil’ business to Scandic Food India Pvt Ltd, for a profit of Rs 106 m. Also, it ended its alliance with Indo Nissin Foods Ltd (INFL) for distributing the Top Ramen range of products.

Consolidated picture
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 3,970 4,675 17.8% 15,569 19,067 22.5%
Expenditure 3,569 4,220 18.3% 13,582 16,604 22.2%
Operating profit (EBDITA) 401 455 13.5% 1,987 2,463 24.0%
EBDITA margin (%) 10.1% 9.7%   12.8% 12.9%  
Other income 87 37 -57.5% 102 67 -34.3%
Interest 47 73 55.1% 206 277 34.2%
Depreciation 115 79 -31.1% 522 309 -40.9%
Profit before tax 326 340 4.3% 1,361 1,944 42.9%
Extraordinary item - 106   140 106 -24.4%
Tax 45 39 -13.1% 372 360 -3.3%
Minority interest - 0.1   0 1  
Profit after tax/(loss) 281 407 44.8% 1,129 1,690 49.7%
Net profit margin (%) 7.1% 8.7%   7.3% 8.9%  
No. of shares (m) 609.0 609.0   609.0 609.0  
Diluted earnings per share (Rs)*         2.78  
Price to earnings ratio (x)*         25.2  
* 12 month trailing earnings

What has driven performance in FY08?
  • The company has continued with its strong performance. While the domestic sales were up by 14% YoY, the group turnover increased by 22.5% YoY. 17% YoY organic growth was accompanied by 5% YoY inorganic growth. Also, robust volume sales were witnessed. The consumer products business reported a growth of 22% YoY led by its flagship brands. Parachute Coconut Oil grew by 10% YoY in volume, while, the focus segment of the hair-care range reported a 16% YoY growth in volume. Saffola yet again marched ahead on its growth path by growing 22% YoY in volume during the year. On account of strong brand loyalty, the company was able to pass on any increases in input prices and maintain its margins per unit volume. Marico commands a 56% share of the coconut oil category in India with its three brands Parachute, Nihar and Oil of Malabar.

  • The sale of ‘Sil’ and ending of its alliance with Indo Nissin Foods would not affect its performance going forward as they were a small part of the total sales. Also, to plug in the gap in its hair oil portfolio, the company continued to roll out new products like gels, cooling oil and conditioners during the year. The healthy pipeline of products aids the company’s growth and also strengthens its position.

  • Kaya’s revenues touched Rs 1 bn in FY08. This is 34% YoY increase over FY07 led by new clinics, volume increase from existing clinics and price increases. During FY08, Kaya Skin Care added 18 clinics. Now, it has in all 65 clinics with 56 in India and 9 in the Middle East. Also, 2 new Kaya life centers were opened in Mumbai, taking the total to 3. Further its products are witnessing strong demand and contributed around 13% to Kaya’s sales. In line with the operating agreement with its joint venture partner, Shantih LLC, Marico has exercised its call option to raise its stake in its subsidiary Sundari LLC from 75.5% to 100%. With effect from October 23, 2007, Sundari has become a wholly owned subsidiary of Marico Limited. This move is to increase its presence in the skin care segment.

  • Marico’s overall international business grew by 59% YoY, while its organic growth over FY07 was 21% YoY. The Egyptian brands, ‘Fiancée’ and ‘HairCode’ are performing as per expectations and achieved a turnover of Rs 880 m during the year (about 5% of its sales). The company has also commenced exports of products to neighboring African nations. Marico had also commenced a green field project in Egypt to serve as a manufacturing base for the MENA (Middle East and North Africa) region. The project in expected to be completed by the end of the calendar year.

  • It also had entered the fast growing South African ethnic hair care and health care market through the acquisition of Enaleni Pharmaceuticals’ Consumer Division Pty Ltd in FY08. The market for Ethnic Hair Care and Relevant OTC Healthcare products in South Africa is estimated to be in the region of about Rs. 6 bn. The company is in the process of integrating the business. During FY08, Marico clocked a turnover of Rs 200 m in South Africa. The company also continues to grow in its traditional markets of Middle East and Bangladesh by launching new products and variants. The international business now comprises about 16% of the group’s turnover. The company’s performance is in line with our estimates.

    Consolidated cost break-up
    As a % of net sales 4QFY07 4QFY08 FY07 FY08
    Total Cost of goods 52.0% 50.8% 51.6% 51.4%
    Staff Cost 4.3% 7.8% 5.8% 6.6%
    Advertising 15.1% 15.2% 13.6% 12.9%
    Other Expenditure 18.5% 16.5% 16.1% 16.1%

  • Inspite of lower raw material and advertisement costs, the margins on the consolidated front remained stable at 12.9% for FY08. Personnel expenses are higher owing to normal remuneration increases, performance incentives and higher head count, particularly in Kaya. On the standalone basis, the margins declined by 0.6% YoY mainly due to the same reasons. Consumer division witnessed improvement in the EBIT margins to 13.4%, while other division continues to face losses. The margins are marginally below our estimates.

  • Lower margins and other income along with lower depreciation (change in depreciation method) led to the net profit growth of 50% YoY on the consolidated basis in the year. However, excluding the extraordinary (exchange gain on loan repayment, an additional charge on account of accelerated depreciation and profit on sale of the Sil business), the growth would have been of 27% YoY. On standalone basis, the bottomline grew by 39% YoY in FY08 (excluding extraordinary), contributing 85% to the consolidated bottomline (down from 103% in 3QFY07) indicating faster growth of its international operations. While interest rates were higher on both the consolidated and domestic front, higher other income in domestic operations aided the performance.

What to expect?
At the current market price of Rs 70, the stock is trading at a price to earnings multiple of 18.4 times our FY10 estimates. The company has demonstrated steady growth on both the topline and bottom line. Over the last 3 years, they have grown at a CAGR of 24% and 34% respectively. It has been investing in both its established brands and its new ones. Over the last few years, the company has launched new products to plug the gap in its offerings and diversify its portfolio. It is also planning to invest in launching new health food products in various formats. As per the management, it would continue to look for acquisitions both in India and the overseas markets and also explore opportunities with a good fit in its focus segments of beauty and wellness. Thus, with the company’s continued focus on growth, expansion and profitability, buoyancy is expected to continue going forward.

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