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Marico: Margins expand on robust sales - Views on News from Equitymaster

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Marico: Margins expand on robust sales
May 7, 2012

Marico Limited has announced its fourth quarter results for financial year 2011-12 (4QFY12). The company has reported a 22.8% YoY growth in sales and 2.7% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Revenues increased by 22.8% YoY led by an underlying volume growth of 13%. All the three business divisions reported robust double-digit growth during the quarter. During FY12, topline grew by 28% YoY.
  • Input cost pressures eased which enabled the company to overcome higher promotional spends and staff costs. EBIDTA margin expanded by 130 basis points during the quarter. However, operating margin for FY12 declined by 120 basis points.
  • In 4QFY12, earnings were down by 2.7% as the year-ago results include extraordinary income of Rs 755 m as compared to exceptional loss of Rs 18 m in the current quarter. For FY12, the earnings increased by 10.5% backed by lower taxes and modest rise in depreciation and interest expenses.


Consolidated picture
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 7,503 9,215 22.8% 31,350 40,083 27.9%
Expenditure 6,675 8,078 21.0% 27,169 35,227 29.7%
Operating profit (EBDITA) 827 1,137 37.5% 4,181 4,856 16.1%
EBDITA margin (%) 11.0% 12.3%   13.3% 12.1%  
Other income 60 67 12.0% 212 314 48.0%
Interest 188 113 -39.9% 410 424 3.3%
Depreciation 302 191 -36.8% 708 725 2.4%
Profit before tax 398 901 126.7% 3,275 4,021 22.8%
Extraordinary items 755 (18)   489 (18)  
Tax 428 189 -55.9% 850 782 -7.9%
Profit after tax/(loss) 724 695 -4.1% 2,914 3,221 10.5%
Minority interest 8 (2)   50 50  
Net profit after tax/(loss) 716 697 -2.7% 2,864 3,171 10.7%
Net profit margin (%) 9.5% 7.6%   9.1% 7.9%  
No. of shares (m)         615  
Diluted earnings per share (Rs)*         5.2  
Price to earnings ratio (x)*         35.0  
* trailing twelve month earnings

What has driven performance in 4QFY12?
  • The company's volume led growth strategy continued to favourably impact the topline that grew by 22.8% YoY on the back of 17% rise in offtake. The growth was broad-based with all the three business divisions reporting double-digit growth. The domestic consumer care business, which contributes more than 60% to consolidated sales, grew by 20% aided by 10% volume growth. Its flagship Parachute coconut oil (rigid packs) registered 18% value growth contributed by 11% rise in volumes. Even its value added hair oils recorded 17.5% rise in volumes. However, the Saffola franchise clocked a relatively muted 11% growth due to a slow 3.3% increase in offtake. The International business with around 22% sales share grew by 37% YoY. While organic growth in existing geographies was around 24%, the inorganic growth from Vietnam stood at 13%. Its specialized skin-care business 'Kaya' posted same store collection growth of 19% during the quarter.
    ost break-up

    >
    As a % of sales 4QFY11 4QFY12 gain/decline in basis points
    Raw material cost 52.8% 46.3% -650.65
    Staff costs 8.3% 9.1% 75.02
    Advertisement costs 9.0% 12.9% 391.51
    Other expenditure 18.9% 19.4% 52.47

  • For the first time in FY12, Marico has been able to improve operating profitability on the back of falling commodity prices. Copra prices accounting for 40% of the overall raw material costs had been escalating since H2FY11 but showed signs of easing in the latter half of FY12. Average copra prices in 4QFY12 were 26% lower than 4QFY11. Resultantly, the company's cost of goods sold to sales ratio fell by 651 basis points which more than offset the 392 basis points jump in advertisement to sales ratio for the quarter. In terms of business segments, the EBIT margin of consumer care contracted by 110 basis points to 11.4%. However, loss making skin care segment curtailed loss at the EBIT level by Rs 106.3 m during the quarter propping up overall operating margin during the quarter.

  • At the net level, Marico has been able to cut down its depreciation and interest expenses by over 35% each. Even tax charges were down by 60% during the quarter. However adjustments to accounts made in 4QFY11 that included sale of Sweekar brand led to an increase in profit base. Consequently profits in 4QFY12 have de-grown by 3% on a YoY basis.

What to expect?
Marico saw its topline grow by a handsome 28% in FY12. The growth is commendable, given that the company held onto prices during the year in a bid to expand its franchise. Its offtake grew by 11% during the year. However, the company's operating margins have been hit due to higher raw material expenses and staff costs.

In February 2012, the company has acquired the personal care business of Paras Pharmaceuticals from Reckitt Benckiser for a consideration of Rs 7.4 bn. The acquisition has been funded by preferential equity issue of Rs 5 bn and internal accruals. The recent acquisition will give Marico a foothold in the rapidly growing deodorant and male grooming categories. The company's strong presence in the emerging markets of India, South Africa, Bangladesh, Vietnam, Egypt and Middle East is expected to benefit it in the long run. The company expects its Kaya business to turn around in FY14. Although prospects from all the three business divisions remain positive, the company's margins are likely to remain under pressure in the short run.

At a price of Rs 180, the stock is trading at 21 times our FY14 estimated earnings. But at current valuations, the stock is expensive and we would advise investors to remain cautious.

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