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Marico: FY14 ends on a slow note

May 8, 2014

Marico Limited has announced its third quarter results for financial year 2013-14 (3QFY14). The company has reported a 7% YoY increase in sales and 6% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Topline excluding the Kaya business grew by 17.4% YoY in 4QFY14. For FY14, revenues excluding Kaya business increased by 10% YoY.
  • The operating margin (ex. Kaya) expanded by 1.7% YoY to 14.4% in 4QFY14 backed by savings in staff costs, ad-spends and other expenditure. During FY14, the operating margin (ex. Kaya) increased by 1.8% YoY.
  • However, the net margin excluding the Kaya demerger and exceptional items contracted by 0.7% to 8.3%. For full year FY14, the net margin (ex. Kaya and demerger) expanded by 0.8% YoY to 10.4%.
  • The company has declared a one-time silver Jubilee third interim dividend Rs 1.75 per share of face value of Re 1 each to commemorate 25 years of incorporation. The company has declared a total dividend of 350% in FY14.

(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Total income 9,986 10,721 7.4% 45,962 46,865 2.0%
Expenditure 8,771 9,178 4.6% 39,704 39,385 -0.8%
Operating profit (EBDITA) 1,215 1,543 27.0% 6,258 7,480 19.5%
EBDITA margin (%) 12.2% 14.4% 2.2% 13.6% 16.0% 2.3%
Other income 102 128 26.3% 375 579 54.3%
Interest 124 68 -45.8% 580 345 -40.6%
Depreciation 253 215 -14.9% 866 769 -11.3%
Profit before tax 939 1,388 47.9% 5,187 6,946 33.9%
Extraordinary items 332 -   332 -  
Tax 406 473 16.5% 1,462 1,905 30.3%
Profit after tax/(loss) 865 916 5.9% 4,057 5,041 24.3%
Minority interest 26 28    98 187  
Net profit after tax/(loss) 839 888 5.8% 3,959 4,854 22.6%
Net profit margin (%) 8.4% 8.3% -0.1% 8.6% 10.4% 1.7%
No. of shares (m)         645  
Diluted earnings per share (Rs)*         7.5  
Price to earnings ratio (x)*         30.5  

What has driven performance in 4QFY14?
  • Marico posted a revenue growth of 17% (excluding Kaya that got demerged effective 1st April 2013) backed by 16% growth in India business and 21% rise in International business. Growth in the Indian business was led by price increases across the portfolio with volumes growing by 6% during the quarter. Among product segments, Parachute's rigid portfolio recorded good growth of 23% driven by revived volume growth of 10% YoY. Value added hair oils (Parachute Advansed, Nihar Naturals and Hair & Care) grew by 18% led by realizations as volumes grew by a tepid 5% on a high base effect. The saffola refined edible oils franchise grew by 14% on a robust 11% volume growth. Parachute Advansed Body Lotion reported single-digit growth in a challenging environment but continued to maintain a 3% market share. The company launched a unique spray-on body lotion during the quarter. The acquired portfolio of Paras brands posted a flat performance due to lower discretionary spends and high base from re-launch of Zatak in the year-ago quarter. While the company has established leadership in hair gels and conditioners, in deodorants the company continues to remain a small player. Marico entered the hair colour category through Livon Conditioning Cream Colour.

  • Marico's international business grew by 21% YoY led by 12% favourable exchange rate movement and 8% volume growth. Post the general elections and easing political and economic sentiments, Bangladesh clocked a recovery with a 22% growth (constant currency) on a 13% volume growth. Revenues in Middle East and North Africa grew by 27% YoY (constant currency) aided by strong growth of 30% YoY in Egypt. Revenues in South Africa grew by a tepid 11% YoY due to high inflation and interest rates pulling down demand. On account of economic slowdown, business in South East Asia mainly comprising of Veitnam fell by 24% YoY
    Cost break-up
    As a % of sales 4QFY13 4QFY14 gain/decline in basis points
    Raw material cost 44.2% 52.2% 804.97
    Staff costs 9.6% 6.1% -355.65
    Advertisement costs 12.6% 11.4% -121.44
    Other expenditure 21.5% 16.0% -550.56

  • Aided by savings in ad-spends, staff costs and other expenses, Marico was able to tide higher raw material costs. During the quarter, prices of copra and rice bran oil were higher by 84% and 20% on a YoY basis respectively. Even price of HDPE was up by 24% and that of Liquid paraffin was higher by 20% during the quarter. However, the price of safflower oil and rice bran oil were lower by 31% YoY and 5% YoY, respectively. As a result, raw material to sales ratio has registered a jump during the quarter. Excluding the impact of the Kaya demerger, the operating margin expanded by 1.7% during the quarter. In the domestic market, operating margins earned were 17% as compared to margins of 17.6% in the international market.

  • Net profits (excluding the Kaya demerger and exceptional items) increased by a muted 8% YoY during the quarter. The company has received 900% dividend from Marico Bangladesh Limited on which income tax of Rs 345 m has been accounted, pushing up the tax incidence during the quarter.
What to expect?
In FY14, Marico's has posted a slower 10% growth (ex. Kaya demerger) due to sluggish demand witnessed in both home and international markets. Volume growth in the domestic markets remained muted at 6% largely due to slow growth in Parachute coconut oil and subdued growth in Saffola refined edible oil. However both these product segments have reported improvement towards the second half of FY14. Even in the overseas markets, weak economic conditions in Bangladesh, Vietnam and South Africa led to 5% growth in offtake. But the long term growth potential in these emerging markets remains bright.

At a price of Rs 230, the stock is trading at 21 times our FY16 estimated earnings. We had a given a SELL on this stock. At current price levels, the stock does not provide adequate margin of safety. Therefore we maintain a SELL on the stock.

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