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Marico: Conference call extracts

Jun 2, 2010

We recently attended the FY10 conference call of Marico Limited. The company is one of India's most respected FMCG companies, having brands in the health and wellness space. The company's brands include Parachute, Saffola, Sweekar, Hair & Care, Nihar, Shanti, Mediker, Revive, Manjal, Kaya, Fiancée, Camelia, Aromatic, Caivil, Black Chic, Hercules and HairCode. The company performed well in FY10 with the topline growing by 11%. Marico benefited from the fall in commodity prices during the year to turn in an operating income growth of 23% during FY10. The company in fact decided to invest its saving from input costs into building the consumer franchise, which resulted in a cap for operating income growth. Marico's bottom line increased by 23% as a result of higher operating profit partly offset by increase in effective tax rates.

The company's volume growth was slightly lower this year as compared to the previous year. The reason was that the company experienced some pressure in the price sensitive coconut oil portfolio. This is the price point at which conversion from loose to branded coconut oil happens. It is also the point where Marico faces the maximum competition. The company has already taken corrective pricing action for this. However, as a result of pipeline stocks, the company expects that the upward trend will take some time.

In new launches, the company launched Saffola Arise during the year. The company saw good response for this product in the estimated Rs 4 bn market. Marico aims to capture 10% of this market in the next 2-3 years.

The second new launch was in the cooling oil category. While the market leader Emami is quite strong in this category, Marico is confident of doing well as its oil is more nourishing than Emami's Navaratna Extra Thanda Oil. Furthermore, the oil has a colour different from the other oils in the market. This makes the product a differential product offering. Marico has in fact launched two cooling hair oils, one in Andhra Pradesh and the other in Bihar. This is based on the company's understanding that the consumer preference in both geographies is sharply different from one another. The company has seen encouraging response in this category so far.

In the new products to be launched, the company has got a healthy pipeline. Although the company has not disclosed which products it intends to launch during the year, it has indicated that it will be focused on hair care, health care and skin care category and that the new launches will be focused on consumer rather than a brand.

Marico has got ambitious plans for the rural markets like other FMCG players. The direct contribution of rural markets to Marico's sales was 25% in FY10. The company is looking to take this up to 30% of sales in the next 2 – 3 years. For this, the company is looking at price point rationalisation and launching of special packs. The company also plans to increase its infrastructure in north and central India. With these measures, the company is confident that rural markets contribution will improve. In fact, when indirect sales are included, the rural markets would contribute 40-42% of sale in 2-3 years time.

This year, Marico's effective tax rate increased from 17% to 21%. However, going forward, company expects its tax rate to come down to sub 20%. This is because the company has started a plant in a tax exempt zone. Also, the growing share of international business in tax exempt zones like UAE and Egypt is also expected to help lower the effective tax rate.

What we expect?

At a price of Rs 106, the stock is trading at 22.5 times our FY12 estimated earnings. The company has performed in line with our estimates. While the company is expected to grow with traction from its international business, we believe that the stock has most of the upside priced in. For this reason we would advise investors to be CAUTIOUS on this stock.

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