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Marico: Scaling new heights

Apr 27, 2005

Introduction to results
Edible and hair oil major, Marico, has reported a decent topline growth numbers for both the March quarter as well as FY05. The company has clocked 13% growth in the March quarter and a 14% growth in FY05. On a standalone basis, Marico reported a topline growth of 8% for 4QFY05 and ended the year with a 12% growth.

Consolidated picture…
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net Sales 2,254 2,538 12.6% 8,888 10,128 14.0%
Expenditure 2,088 2,313 10.8% 8,142 9,246 13.6%
Operating Profit (EBITDA) 167 224 34.7% 745 882 18.3%
EBITDA margin (%) 7.4% 8.8%   8.4% 8.7%  
Other Income 8 0 -98.7% 29 16 -44.5%
Interest 4 6 47.5% 12 20 70.9%
Depreciation 32 51 59.4% 130 148 14.0%
Profit before Tax and minority interest 138 167 21.1% 633 730 15.3%
Minority interest 4 5 17.5% 18 13 -
Tax -21 -21 - 61 41 -32.4%
Profit after Tax/(Loss) 163 193 18.3% 590 702 19.0%
Net profit margin (%) 7.2% 7.6%   6.6% 6.9%  
No. of Shares (m) 29.0 58.0   29.0 58.0  
Diluted Earnings per share (Rs)* 11.2 13.3   10.2 12.1  
P/E Ratio (x)         20.0  

What is the company's business?
Marico is the market leader in the Rs 5 bn plus branded Indian coconut hair oil market with over 55% market share (Parachute). In edible oils, the company's brands 'Sweekar' and 'Saffola' occupy the No. 2 position, with 13% share of this Rs 14 bn market. The company has also extended its 'Parachute' brand to the value added oil category (Parachute Jasmine). The brand is now No. 2 in this category with a 31% market share. 'Hair & Care', Marico's non-sticky hair oil brand is also No. 2 in its category. Apart from oils, Marico's product range also includes Mediker (Anti lice shampoo and oil - 100% share), Jams (Sil - 8% share) and fabric starch (Revive - nearly 100% share). Over the past two years, Marico has entered the skin care related businesses by acquiring 63% stake (currently 75.5% stake) in 'Sundari' range of ayurvedic skin care products in the US (revenues US$ 1 m), as well as rolling out 27 skin care clinics under the brand 'Kaya'.

Marico Industries snapshot…
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net Sales 2,141 2,320 8.3% 8,476 9,478 11.8%
Expenditure 1,998 2,089 4.5% 7,768 8,641 11.2%
Operating Profit (EBDITA) 143 231 61.8% 708 837 18.2%
EBITDA margin (%) 6.7% 10.0%   8.4% 8.8%  
Other Income 23 25 8.7% 44 59 32.9%
Interest 1 (1) -135.7% 8 4 -47.6%
Depreciation 26 42 58.4% 111 116 5.0%
Profit before Tax 138 215 55.6% 634 776 22.4%
Extraordinary income     - 0 0 -
Tax (25) (18) -26.4% 54 38 -29.4%
Profit after Tax/(Loss) 163 234 43.0% 580 738 27.2%
Net profit margin (%) 7.6% 10.1%   6.8% 7.8%  
No. of Shares (m) 29.0 58.0   29.0 58.0  
Diluted Earnings per share (Rs)* 11.3 16.1   20.0 12.7  
P/E Ratio (x)         19.2  

What has driven performance in 4QFY05?
Volumes lead growth in topline:  Sustained volume growth across categories, realignment of portfolio and consolidation of market share has resulted in the company cruising the quarter and ending the fiscal with a good topline growth.

Cost Structure
% of total Sales FY04 FY05
Material Cost (Raw+packaging) 64.6% 62.4%
Advertising and Sales promotion 8.2% 9.7%
Personal costs 4.8% 4.3%
Other Expenses 13.0% 13.8%
Depreciation 1.3% 1.2%
Total Operating Costs 91.9% 91.4%
Net Operating Margin 8.1% 8.6%
PBDIT Margins 9.4% 9.8%
Domestic market:  Parachute coconut oil, the flagship brand grew by 8% YoY in volume terms helped by its relaunch in FY05. Marico's coconut oil brands have an all-India market share of over 50%. The Hair Care range (Parachute Jasmine, Shanti Amla, Mediker and Hair & Care being the key elements) grew by 14% YoY in volume terms and 19% YoY in value terms. In the premium refined Oils market, the Saffola brand clocked a record growth of 18% YoY in volumes aided by healthy volumes in its blends, namely Saffola Tasty and Saffola Gold, which were launched in FY05. Sweekar declined in volume by 9% YoY. Revive, operating in the fabric care segment, held on to its volumes. In the anti-lice market, Marico continued to be the only organized national player, with its offering of Mediker, in shampoo and oil formats.

International market:  Marico's International FMCG business also aided the overall growth during the quarter. The sales turnover of the International FMCG business grew by 29% YoY to Rs. 960 m as compared to Rs 740 m in FY04. In Bangladesh, Parachute coconut oil consolidated its market leadership and crossed 50% market share in March 2005. Parachute cream continued to grow in the Gulf countries resulting in volumes doubling during FY05. Parachute Sampoorna and hair tonic were two new products launched in the Gulf markets. The aggregate International business of Marico, comprising the FMCG business, Kaya in UAE and Sundari in the US now stand at Rs 1 bn and thus contribute to around 10% of the Group turnover.

Robust topline growth aids margin expansion:  Operating margins have grown both in the quarter as well as for FY05. This is a sign of recovery in the FMCG sector, but at the same time, its new businesses (Kaya Skin Care and Sundari Llc) have yet to turn profitable and are currently eating some part of the consolidated company's profits.

Kaya, Sundari impact net profits:  Marico's Kaya Skin Care business clocked Rs 209 m and Sundari recorded Rs 55 m as revenues during FY05. Both businesses, however, ate away Rs 132 m from the consolidated entity's net profit. It will be some time before these ventures turn profitable. However, the topline performance of both businesses looks encouraging and the company expects both these ventures to achieve operating break even in 6-9 months of set up.

What to expect?
At Rs 242, the stock is trading at a price to earnings multiple 20.0 times FY05 consolidated earnings, and a market cap to sales of 1.4 times. The board has declared a fourth interim dividend of Rs 1.75 per share (dividend yield of 0.7%), taking the total dividend to Rs 5.35 for FY05. Keeping in mind the continuous double-digit turnover growth that the company has been able to maintain since the last couple of years, led by new products and international markets, the valuations look decent. The management's continuous flow of bonuses and dividends is also a sign of shareholder friendliness.

The company's results are in line with our expectations and we continue to be overweight on the stock. We will soon come out with our FY08 estimates, as there is a meeting scheduled with the management at the end of the week.

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