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Marico: Copra prices put pressure on margins - Views on News from Equitymaster
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Marico: Copra prices put pressure on margins
May 3, 2011

Marico Limited has announced its fourth quarter results for financial year 2010-2011 (4QFY11). The company has reported a 24.1% YoY and 40% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line during 4QFY11 grew by 24.1% YoY.
  • Operating (EBITDA) margin fell by 3.6% during the quarter to 10.5%. This fall comes on the back of higher raw material costs and increase in staff costs (both as a percentage of sales) partially offset by lower advertisement and sales promotion expense and lower other expenditure (both as a percentage of sales).
  • Net profit grew by 40% YoY aided by higher other income and one time income partially offset by higher interest costs, higher depreciation and increase in effective tax rate. When adjusting for onetime items and deferred tax associated with these items, net profit for the quarter fell by 55.4% YoY.
  • For FY11, the company's net profit grew by 23.6% YoY while the net profit margin improved by 0.5% to 9.2%. This performance comes on the back of higher other income and onetime gains partially offset by increase in effective tax rate.

Consolidated picture
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 6,023 7,473 24.1% 26,608 31,283 17.6%
Expenditure 5,173 6,686 29.2% 22,856 27,185 18.9%
Operating profit (EBDITA) 849 788 -7.3% 3,751 4,098 9.2%
EBDITA margin (%) 14.1% 10.5%   14.1% 13.1%  
Other income 53 93 76.0% 183 279 52.6%
Interest 50 182 260.6% 257 393 53.1%
Depreciation 157 302 92.2% 601 708 17.9%
Profit before tax 695 398 -42.8% 3,077 3,275 6.5%
Extraordinary items (57) 755   (98) 489  
Tax 117 428 265.4% 643 850 32.1%
Profit after tax/(loss) 520 724 39.2% 2,335 2,914 24.8%
Minority interest 9 8   19 50  
Net profit after tax/(loss) 511 716 40.0% 2,317 2,864 23.6%
Net profit margin (%) 8.5% 9.6%   8.7% 9.2%  
No. of shares (m) 609 614   609 614  
Diluted earnings per share (Rs)*         4.7  
Price to earnings ratio (x)*         31.1  
* trailing twelve month earnings

What has driven performance in FY11?
  • Of the 18% YoY top line growth clocked by Marico, volume growth was 12% YoY while the rest was the result of price hikes to mitigate input price increases. Parachute rigid packs achieved a volume growth of 10% YoY. The volume market share of coconut oil Parachute, Nihar and Oil of Malabar stood at around 52.6%. Saffola saw a volume growth of 16% YoY on the back of media campaigns and increasing concern around health and healthy heart in India. Marico's portfolio of value added hair oil grew by 24% YoY in volume terms as a result of packaging, restaging, media campaigns and launching packs at penetrative price points. Volume market share for value added hair oils now stand at 23% up from 17% four years ago. Rural sales of the company grew faster than urban sales and comprised about 27% of Marico's Indian FMCG sales in FY11 compared to 25% in FY10.

  • International business which comprises 23% of the group turnover grew by 27% YoY during the year driven by a 17% YoY volume growth and 8% YoY value led growth. However, the growth was depressed to the extent of 4% YoY as a result of currency appreciation. Kaya business grew by 31% YoY boosted by the acquisition of Derma Rx. On a like to like basis, Kaya grew by 7% YoY with same store sales growing by 2% YoY. Sales for Kaya stood at Rs 2390 m for FY11. Kaya clinics ended the year at a figure of 103 Kaya clinics operational.

    Cost break-up
    As a % of sales 4QFY10 4QFY11 FY10 FY11
    COGS 43.9% 53.0% 47.4% 51.7%
    Staff costs 7.2% 8.4% 7.1% 7.4%
    Advertisement costs 14.8% 9.0% 13.2% 11.1%
    Other expenditure 19.9% 19.1% 18.1% 16.8%

  • Operating margins fell on the back of higher raw material costs as a result of rise in copra prices. Copra prices were higher by 45% YoY in FY11 compared to the same period last year. Price of rice bran oil was up by 21% YoY during the same period. Higher staff costs also added to the pressure on operating margins. Staff costs increased by 21% YoY. However, fall in advertisement costs and other expenditure growing slower than sales helped support the operating margins. Advertisement expense fell by 1% YoY while other expenditure grew by 9% YoY.

  • Net profits grew by 23.6% YoY. This performance was due to higher other income and onetime income recorded during the year, partially offset by increase in interest cost and higher effective tax rates. Interest cost increased by 53% YoY while effective tax rate increased from 21% in FY10 to 26% in FY11.

What to expect?
At a price of Rs 145, the stock is trading at 24.4 times our FY13 estimated earnings (RPro subscribers click here). The company has performed well during the year on strong volume growth and is seeing good traction in its edible oil, value added oil and international businesses. However, we believe the stock has most of the upside priced in. For this reason, we would advise investors to be CAUTIOUS on this stock.

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