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Marico: Non-sticky quarter - Views on News from Equitymaster

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Marico: Non-sticky quarter

Apr 27, 2007

Performance summary
Edible and hair oil major, Marico announced its results for the fourth quarter and fiscal ended March 2007 yesterday, wherein it reported a stellar topline and a decent bottomline growth. Strong all round growth across its divisions led to a 36% YoY growth in the topline for the full year. The exhaustion of the tax exemption on some of the manufacturing units has led to higher effective tax rates. The bottomline growth has been lower than the topline performance due to higher interest cost as well.

Consolidated picture
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 2,977 3,969 33.3% 11,439 15,569 36.1%
Expenditure 2,613 3,568 36.5% 9,996 13,442 34.5%
Operating profit (EBDITA) 364 401 10.3% 1,443 2,127 47.4%
EBDITA margin (%) 12.2% 10.1%   12.6% 13.7%  
Other income 2 87 4250.0% 35 102 191.4%
Interest 23 47 104.3% 51 206 303.9%
Depreciation 95 115 21.1% 447 522 16.8%
Profit before tax 248 326 31.7% 980 1,501 53.2%
Tax 6 45 603.1% 112 372 232.1%
Effective tax rate 2.6% 13.8%   11.4% 24.8%  
Profit after tax/(loss) 241 281 16.5% 868 1,129 30.1%
Net profit margin (%) 8.1% 7.1%   7.6% 7.3%  
No. of shares (m)** 578.7 600.6   578.7 600.6  
Diluted earnings per share (Rs)** 1.7 1.9   1.5 1.9  
Price to earnings ratio (x)*         29.8  
* 12 month trailing earnings
**Marico had a stock split in the ratio of 10:1 in February 2007

What is the company’s business?
Marico is the leader in the Rs 5 bn+ branded Indian coconut hair oil market, with over 50% share (Parachute). In edible oils, the company’s brands, ‘Sweekar’ and ‘Saffola’ occupy the No. 2 position, with 13% share of the Rs 14 bn edible oil market. The company has also extended its ‘Parachute’ brand to the value added oil category (Parachute Jasmine). This brand is now No. 2 in the value-added 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). In FY03, Marico entered the skin care-related businesses by acquiring 63% stake (currently over 75%) 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’. The company also recently acquired ‘Nihar’, the hair oil unit of HLL, which has an annualised turnover of Rs 1.2 bn and operates in two segments – coconut oil and perfumed oil.

What has driven performance in 4QFY07?
Franchise led growth: Marico’s 4QFY07 revenues grew by 33% YoY. This comprised 21% organic growth accompanied by 12% inorganic growth. Across categories, franchise expansion was the chief growth driver. The company did not take any significant increase in consumer prices. All the business segments namely, domestic FMCG, international FMCG, Kaya Skin Solutions and Sundari Spa Skin products recorded high growth rates. In the recent past, the company has stepped up its spends on brand building in its flagship brands as well as nurturing of new products. These efforts have resulted in healthy volume growth. Besides, the company has expanded its portfolio through acquisitions, which have provided additional growth drivers. During the quarter, the focus brands turnover comprised 79% of the group turnover.

Overall, the consumer products division registered a growth of 35% YoY for the quarter. Besides, the company has expanded its portfolio through acquisitions, which will provide added impetus in the coming years.

Segmental breakup
Revenue FY06 FY07 Change
Consumer Products 10,898 14,738 35.2%
% of total revenue 95.3% 94.7%  
Others 541 831 53.6%
% of total revenue 4.7% 5.3%  
Total 11,439 15,569 36.1%
PBIT FY06 FY07 Change
Consumer Products 1,233 1,762 42.9%
% of total PBIT 119.7% 103.2%  
PBIT margin 11.3% 12.0%  
Others (203) (55) -72.9%
% of total PBIT -19.7% -3.2%  
Total 1,030 1,707 65.7%

On the domestic front, the flagship brand, Parachute coconut oil achieved another quarter of double-digit volume growth. Volume sales of Parachute in 4QFY07 grew by 13% YoY. The focus segment of the hair-care range (Parachute Jasmine, Shanti Amla Badam, and Hair & Care being the key elements) grew by 17% in volume (excluding Nihar). In the premium refined oils market, Saffola, the company’s second flagship, grew by 19% YoY in volume terms.

Parachute has maintained its retail prices since August 2004. In a declining input price scenario, the brand’s ability to hold retail prices has enabled it to expand gross margins. A part of these incremental margins have been ploughed back into the business through advertising expenditure in Parachute as well as new brands in Marico’s portfolio. During 4QFY07, input prices have increased by about 8% YoY. While input price rises have not been forecasted, the company expects copra prices in FY08 to be higher by 7% to 10% YoY. The company has communicated that it may consider an increase in the retail prices of Parachute during FY08.

International operations: During 4QFY07, Marico’s international FMCG business excluding operations in Egypt clocked a growth of 24% YoY. The company had commenced marketing and distribution of ‘Fiancee’ in Egypt in December 2006. During the quarter, sales of HairCode, its second Egyptian acquisition in post-wash hair care, commenced too. The total growth in the international business in 4QFY07 was 74% YoY.

Kaya bearing fruit: The skin care solutions business under the brand Kaya, broke even during FY07. During 4QFY07, Kaya recorded a growth of 52% YoY in turnover and during the year, Kaya focused on improving the capacity utilisation in existing clinics. The company expects that the utilisation average of about 50% can be pushed up to 60% to 65% in FY08.

Consolidated cost break-up
As a % of net sales 4QFY06 4QFY07 FY06 FY07
Total Cost of goods 51.4% 52.0% 52.6% 51.6%
Staff Cost 5.6% 4.3% 6.8% 5.3%
Advertising 16.2% 15.1% 12.1% 13.3%
Other Expenditure 14.6% 18.5% 15.8% 16.1%

Brand building reduces margins: In 4QFY07, Marico’s operating margins declined by over 210 basis points (2.1%) on a consolidated basis. The company’s raw material costs as a percentage of sales increased to 52% (51.4% in 4QFY06). Also, Marico has invested in brand building and advertising spends to strengthen its established brands and to support new ones. As a percentage of sales, the advertising expenses have gone up to 13.3% in this fiscal. While other expenditure (as a % of sales) remained constant, staff expenses reduced from 6.8% in FY06 to 5.3% in FY07.

Bottomline picture: Marico witnessed a dent of 100 basis points in its net profit margins during 4QFY07, primarily due to the higher interest outgo (due to rise in interest rates) and higher tax rates. The effective tax rate inclusive of fringe benefit tax and deferred tax during the current fiscal is about 25% (including the one time impact of provision for earlier years). This is as compared to 11% during the same period in the previous year. The increase in the effective tax rate is mainly because of the tax exemption on some of the manufacturing units being exhausted. From this year onwards (for a period of 5 years), the Pondicherry plant (for Parachute) has 30% of its profit exempt as against 100% exemption upto FY06. FY07 was the last year when the Parachute factory at Goa enjoyed an exemption on 30% of its profits. From FY08, its profits will be fully taxable. The company will however continue to avail of the income tax exemption at its manufacturing units in Uttaranchal and get a tax shield from the brand acquisitions that it has made. The rate of effective tax is likely to be about 25% in FY08.

What to expect?
At the current market price of Rs 56, the stock is trading at a price to earnings multiple of 29.8 times its trailing 12-month earnings. The board has declared an interim dividend of 20 paise per share (dividend yield of 0.4%). Going forward, Marico’s strategy includes focus on growth, sustainability and profitability. Though in the quarter, the company did face margin pressure, on a long-term basis, its move to invest in brand building is expected to reap benefits. With the new acquisitions and new products, the topline is expected to remain strong. Though we are positive about the company’s growth prospects, the valuations look stretched at the current juncture.

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