Marico: FY15 ends on slow offtake

Marico Limited has announced its fourth quarter results for financial year 2014-15 (4QFY15). The company has reported a 14% YoY increase in sales and 24% YoY rise in net profits. Here is our analysis of the results.

Performance summary

• Revenues grew by 14% YoY in 4QFY15 led by 17% YoY growth in domestic revenues. For FY15, the topline recorded growth of 22% YoY primarily driven by realizations as domestic offtake grew by a mere 6%.
• The operating margin contracted by 0.4% YoY in 4QFY15 due to a faster rise in staff costs and other expenses. For FY15, the operating margin reduced by 0.8% YoY on high input costs.
• However at the net level, the company has managed to expand margin by 0.7% in 4QFY15 due to lower interest and depreciation outgo. The net margin contracted by 0.4% YoY in FY15.

Standalone financial snapshot

(Rs m)	4QFY14	4QFY15	Change	FY14	FY15	Change
Total income	10,721	12,263	14.4%	46,865	57,330	22.3%
Expenditure	9,181	10,550	14.9%	39,388	48,629	23.5%
Operating profit (EBDITA)	1,540	1,713	11.2%	7,477	8,701	16.4%
EBDITA margin (%)	14.4%	14.0%	-0.4%	16.0%	15.2%	-0.8%
Other income	131	188	42.7%	582	589	1.2%
Interest	68	56	-16.9%	345	229	-33.4%
Depreciation	215	200	-7.0%	769	844	9.8%
Profit before tax	1,388	1,644	18.4%	6,946	8,217	18.3%
Extraordinary items	-	-		-	-
Tax	473	528	11.7%	1,905	2,368	24.3%
Profit after tax/(loss)	916	1,116	21.9%	5,041	5,849	16.0%
Minority interest	28	16		187	114
Net profit after tax/(loss)	888	1,100	23.9%	4,854	5,735	18.1%
Net profit margin (%)	8.3%	9.0%	0.7%	10.4%	10.0%	-0.4%
No. of shares (m)					645
Diluted earnings per share (Rs)*					8.9
Price to earnings ratio (x)*					42.2

* trailing twelve month earnings

What has driven performance in 4QFY15?

• Riding on a 17% YoY growth in domestic operations, Marico reported a 14% YoY revenue growth. The growth in revenues from the international business remained tepid at 6%. During the quarter, the company started the process of automating the sales order management and distributor replenishment system in the domestic markets. Therefore due to a one-time reduction in distributor level inventory (Rs 350 m); the primary sales growth remained muted at 3% even as secondary volume growth was healthy at 7%. The overall sales growth received a leg-up by price increases taken across the portfolio to cover input cost inflation. Among product segments, Parachute's rigid portfolio posted a strong growth of 34% YoY driven largely by realizations as primary volumes were up by 5% YoY. The value added hair oils portfolio registered a 14% YoY growth on a volume growth of 5% YoY. However, the Saffola edible oil franchise grew by a mere 3% YoY. The poor growth was due to lack of pricing action to correct the price premium with respect to the other refined oils that led to1% downfall in its offtake for the quarter. The Youth brands portfolio grew by 10% in terms of primary sales.

• Marico's international business recorded growth of 6% YoY with constant currency growth of 8% YoY. The low growth has been on account of 1% decline in revenues from largest market Bangladesh (45% share of overseas business) in constant currency terms due to political unrest. The South East Asian business registered a 25% jump in business backed by uptick in sales from Vietnam. The sales from South Africa and MENA regions were up by 3% and 5% respectively during the quarter. The company is scaling up its presence in Malaysia, Myanmar and Cambodia.
  Cost Breakdown

  As a % of sales	4QFY14	4QFY15	gain/decline in basis points
  Raw material cost	52.2%	52.0%	-17.40
  Staff costs	6.1%	6.4%	30.21
  Advertisement costs	11.4%	11.2%	-18.67
  Other expenditure	16.0%	16.4%	45.34

  
  
• The operating margin remained under pressure in 4QFY15 due to higher staff costs and other expenses (both as a proportion of sales). The impact was partially offset by 0.2 % savings in input costs. While the average market price of copra was up by 16% YoY, prices of the other inputs such as rice bran oil, liquid paraffin and HDPE were down by 5%, 30% and 15% on a YoY basis, respectively during the quarter. Even ad spend-to-sales ratio was down by 0.2% for the quarter. The operating margin contracted by 0.4% YoY during the quarter.

• The net profit margin has expanded by 0.7% on the back of reduction in interest costs and depreciation as well as a 43% jump in other income earned during the quarter. Even the company's tax incidence fell to 32% in 4QFY15 from 34% in 4QFY14.

What to expect?

Marico has posted robust topline growth of 22% in FY15 driven by 26% growth in domestic operations and 10% rise in international business. But majority of the growth has come from realizations as domestic volume growth was a subdued 6% during the year. The volume growth in the fourth quarter was also hit reduction in distributor stocks due to the automation in order management. Sluggish offtake along with a steep 60% YoY jump in copra prices has kept the company's margins under pressure during the year.

Going ahead, Marico wants to focus on premium products in valued added oils and expand in high margin categories such as hair gels and serums. Therefore in urban India, the company wants to expand direct distribution beyond general trade to other channels such as modern trade, chemist and cosmetic stores. The company's sales from the rural markets continue to grow faster than urban sales. Presently rural sales account for 33% of the total domestic sales which Marico wants to increase to 35%. In the overseas markets, the company has been expanding in the adjacent markets of Nepal, Pakistan, Cambodia and Myanmar and expects incremental revenues of Rs 1000 m in FY16.

At a price of Rs 375, the stock is trading at 30 times our FY17 estimated earnings. We had a given a SELL on this stock. At current price levels, the stock is overpriced. Therefore we would recommend investors not to buy the stock at current price levels.