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Marico: Cautiously optimistic - Views on News from Equitymaster
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Marico: Cautiously optimistic
May 15, 2009

Marico recently held an analyst meet to discuss its growth prospects for the future. Here are the key takeaways. Topline front: Marico has seen a topline growth of 28% CAGR in the last three years. During FY09 sales grew by 25% YoY driven by 12% growth in organic volumes and 1% growth in inorganic volumes. The company also witnessed the rural region growing at a faster pace than the urban areas in FY09. The company plans to concentrate more on certain rural territories in FY10 and also marginally tweak pricing towards the rural segment. As far as the growth of its brands are concerned, it expects coconut oils to grow by 6-8% and its value added hair oils to grow by 12-14%. Conversion from loose to branded hair oils and increase in frequency of usage would lead to the growth. Marico is also targeting a 25% revenue contribution from non edible oil business under the Saffola brand over the next 3-5 years. It is looking at increasing its functional foods portfolio and is in the process of beefing up its distribution reach. .

New initiatives: Saffola Zest, Saffola Rice, Saffola functional foods – Cholesterol and Diabetes Management Atta Mix, Nihar Naturals Coconut Cooling Oil, Parachute Therapie Hair Fall Solution and Parachute Advanced Revitalising Hot Oil among others were prototyped. The company is likely to continue investing in brands.

Kaya: Kaya earned revenues to the tune of Rs 1.6 bn during FY09, higher by 57% YoY. It added 20 new clinics, taking the total number of clinics to 85. The growth from clinics that were opened before April 2008 stood at 18% YoY. Marico will continue to expand and is expected to add 15 new clinics this fiscal. In case of Kaya Life, 4 clinics are operational. The management is planning to improve the model before scaling it up. Though Kaya is not yet profitable, the company expects it to breakeven in FY10.

Capex: The company has planned a capital expenditure of 1 bn for the next 3 years excluding acquisitions. Of this total capex, 50% is earmarked for Kaya. The company will fund the capex through a mix of debt and internal accruals.

International division: Grown at a CAGR of 45% during the last four years, the international division did witness a tough environment during FY09 on account of high inflation and volatile currency movements. It now contributes 18% to total revenues. The company continued to gain market share in Bangladesh’s hair oil segment. Parachute now has 73% share as compared to 67% last year. It introduced the Haircode products in this region. Even in GCC region, Marico’s share in categories such as hair creams has grown from single digit to 23%. Growth in the GCC countries is likely to continue being robust driven by improvement in market penetration. In case of Egypt, while it incurred losses last fiscal, the management expects it to be back on track during FY10. South Africa earned revenues to the tune of Rs 500 m. New products prototypes and expansion in Southern Africa is planned for the current fiscal. While the management expects the volume growth to be higher than 10%, revenues can get skewed in case of unfavourable currency movements. Further, acquisitions are likely to continue, if the right opportunities present themselves.

Input costs: The company expects copra and safflower prices to be lower than last year. Even liquid paraffin and packaging costs are likely to fall by 10% YoY. Backed by lower input and supply chain costs, the operating margins would improve.

What to expect?
At the current price of Rs 63, the stock is trading at a price to earnings multiple of 16.6 times our estimated FY11 earnings. We expect a 10 to 11 % growth in the topline during FY10, in line with what the management says. Margins would also see some upside. A mix of expanding its existing franchises through new offerings, new regions and brand spends would aid growth. In case of Kaya some slowdown in growth would be seen due to lower consumer spending, albeit with a lag effect. Further, the management has indicated being cautious on account of a higher base and uncertain economic conditions and currency fluctuations. While we remain positive on the growth prospects of the company, the stock’s valuations are on the higher side and as such we would advise investors to be cautious while investing in the stock.

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