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Marico: Analyst meet extracts
May 13, 2005

Hair oil major and a recent entrant in skin care services in India, Marico, recently announced its 4QFY05 and full year numbers. Here are some key excerpts of the management analyst meet that we attended.

What is the company’s business?
Marico is the market leader in the Rs 5 bn plus branded Indian coconut hair oil market, and in edible oils, the company’s brands ‘Sweekar’ and ‘Saffola’ occupy the No. 2 position, with 14% share of this Rs 14 bn market. The company has also extended its ‘Parachute’ brand to the value added oil category (Parachute Jasmine). ‘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 – 96% share), Jams (Sil – 7% share) and fabric starch (Revive – nearly 100% share). Over the past two years, Marico has entered the skin care related businesses by acquiring 63% stake (currently 75.5% stake) in ‘Sundari’ range of ayurvedic skin care products in the US (revenues US$ 1 m), as well as rolling out 34 skin care clinics under the brand ‘Kaya’.

Management view on FY05 performance:
Hair oil snapshot:  The company’s flagship brand ‘Parachute’ gained 5% market share during the year, taking its share to over 50% of the total branded coconut hair oil pie. Also, ‘Parachute Sampoorna‘, captured 5% of the value added coconut oil market, and ‘ Parachute Jasmine’ commands a 10% share in the same segment. Overall, the company’s hair oil segment grew by 8% in volume terms due to increased micro marketing initiative, resulting in higher consumption at the top end.

Hair & Care:  This product was re-launched in the year with modified formulation and a new perfume, which resulted in a growth of 14% YoY. However, the smaller pouches of the same brand did not perform well and infact, showed de-growth during the fiscal. Shanti Amla also, did not perform well during the year and hence, Marico plans to relaunch it in a ‘Badam’ variant.

Edible oils:  The Company’s flagship brand ‘Saffola’ grew by a strong 18% YoY backed by the variants strategy and innovative 4 cornered approach. Saffola Gold, a blend of Kardi and Rice Bran oils was launched during the year and the response was satisfactory.

Kaya skin clinic:  Marico expanded its Kaya reach in India from 15 outlets in FY04 to 32 in FY05. The company also opened a new outlet in Dubai, making it 2 outlets in the UAE. The business model of Kaya is different from that of FMCG, and clinics achieve operating break even in 8-9 months. Capacity utilization is the key factor as fixed costs are much higher.

Sundari:  When acquired by Marico 2 years back, it was a retail brand with sales of US$ 1 m. Marico re-aligned the strategy, with focus on sales and cost management, resulting in its entry in topnotch Spa’s in the US (Marriott) and Indonesia. One must remember that the US does not have ‘hair oiling’ habits. But the company had initially thought that through Sundari, it would be able to market its flagship hair oil brands in the country but failed to do so. Hence, it is looking at entering Spa’s now. But, lag time from approach to first order for this business is around 6-8 months, which is a long period.

International business:  Marico has a presence in 21 countries worldwide and total revenues (including Kaya and Sundari) increased to Rs 1 bn in FY05, transforming into a value growth of 29% YoY. In Bangladesh also, Parachute commands a market share of 50% (42% in FY04). It recently acquired 2 soap brands with a turnover of Rs 40 m, in order to extend its presence there and has also earmarked new product launches in this country. For the Middle East, Marico had developed a special product, ‘Parachute Hair Cream’, which was a big success and volumes grew by about 100% YoY. It has also planned another product called Parachute Hair Tonic, for this region.

Going forward:  The company’s focus area continues to be the pre and post wash hair market and not the wash market (i.e. not shampoos), and continues to de-focus on its low margin portfolio like Sweekar. The company expects its Bangladesh subsidiary to grow at around 20%-25%, while Middle East and Africa is expected to grow at around 10% in the coming quarters. Marico has targeted breakeven for it’s Kaya venture in FY07. The company has plans to open 10 new Kaya outlets in FY06. But, the company does not expect to achieve break-even for Sundari in the current fiscal.

As per the management, the edible oil, soaps and personal care segments are out of the slump and hence, they are foreseeing and increase in the company’s pricing power, resulting in a positive trend overall. Certain key categories like health food, grooming and personal care are expected to grow at a much faster pace.

What to expect?
At Rs 242, the stock is trading at a price to earnings multiple of 16.0 times our FY08 estimates, and a market cap to sales of 1.1 times. The board declared a fourth interim dividend of Rs 1.75 per share, taking the total dividend to Rs 5.35 for FY05 (dividend yield of 2.2%). Keeping in mind the continuous double-digit turnover growth that the company has been able to maintain since the last couple of years, led by new products and international markets, the valuations look decent. The management's continuous flow of bonuses and dividends is also a sign of shareholder friendliness.

However, VAT continues to remain a cause of concern as it the case with all FMCG companies. The management indicated that due to confusing signals arising out of VAT, sales have been hit across the country by around 10% in April, which will reflect in 1QFY06. No doubt, Marico will gain with the successful implementation of VAT in the long run because of uniform rates across the country, there is a negative impact in the short term. For that investors, need to watch out for. But our long term view on the company continues to be positive.

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