Marico: Well 'oiled' quarter - Views on News from Equitymaster

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Marico: Well 'oiled' quarter

Jul 21, 2004

Introduction to results
Edible and hair oil major, Marico, has reported strong topline growth numbers for the June quarter. The company has clocked nearly 17% growth in consolidated revenues led by strength in its consumer care business. Operating margins seem under some pressure as compared to last year. However, lower interest and tax outgo helped the company post 19% growth in bottomline.

(Rs m) 1QFY04 1QFY05 Change FY04 YoY change
Net Sales 2,092 2,439 16.6% 8,888 14.6%
Other Income 7 3 -57.1% 29 -74.0%
Expenditure 1,897 2,218 16.9% 8,142 16.4%
Operating Profit (EBDIT) 195 221 13.3% 745 -1.6%
Operating Profit Margin (%) 9.3% 9.1%   8.4%  
Interest 5 4 -20.0% 12 6.4%
Depreciation 30 31 3.3% 130 -41.0%
Profit before Tax and minority interest 167 189 13.2% 633 -0.8%
Minority interest 5 6 20.0% 18 -
Tax 30 26 -13.3% 61 -21.1%
Profit after Tax 142 169 19.0% 590 4.9%
Net profit margin (%) 6.8% 6.9%   6.6%  
Effective tax rate (%) 18.0% 13.8%   9.7%  
No. of Shares (m) 29.0 58.0   29.0  
Diluted earnings per share* (x) 9.8 11.7   20.3  
P/E ratio (x)   10.7      
(* annualised)          

What is the company's business?
Marico is the market leader in the Rs 5 bn plus branded Indian coconut hair oil market with over 55% market share (Parachute). In edible oils, the company's brands 'Sweekar' and 'Saffola' occupy the No. 2 position, with 13% share of this Rs 14 bn market. The company has also extended its 'Parachute' brand to the value added oil category (Parachute Jasmine). The brand is now No. 2 in this category with a 31% market share. '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 - 100% share), Jams (Sil - 8% 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 in 'Sundari' range of ayurvedic skin care products in the US (revenues US$ 1 m), as well as rolling out 15 skin care clinics under the brand name 'Kaya'.

What has driven performance in 1QFY05?
Sales: Growth was largely volume led during the period under review. Flagship brand 'Parachute' grew by 6% YoY led by a relaunch in the March quarter. Value added hair oils portfolio (Parachute Jasmine, Hair & Care and Shanti Amla) grew by 10% in volume terms. In edible oils, Saffola franchise grew by a strong 11% led by the launch of 'Saffola Gold' (a premium product). Marico's international business grew by a strong 32% during the quarter and now contributes 10% to the company's consolidated turnover. Apart from this, its new businesses (Kaya Skin Clinics and Sundari Ayurvedic) doubled their combined turnover to nearly Rs 40 m.

Operating margins: Increase in advertising costs as percentage of sales to 10% during the quarter seems the key reason for the marginal dip in operating margins. Other expenditure too went up. However, total cost of goods and staff costs as a percentage of sales were down marginally.

Cost break-up
as a % of net sales 1QFY04 1QFY05
Total Cost of goods 63.0% 61.3%
Staff Cost 5.3% 5.0%
Advertising 8.1% 10.0%
Other Expenditure 14.3% 14.7%

Net profit: The growth of 19% in bottomline was largely driven by the strength in topline. Lower interest outgo and tax provisioning further added to the company's profit growth. Though new businesses of Kaya Clinics and Sundari Ayurvedics continued to eat into the consolidated profits, their combined losses were lesser at Rs 21 m (23 m loss in 1QFY04).

Over the last four quarters
2QFY04 3QFY04 4QFY04 1QFY05
Sales growth (YoY) 15.2% 17.4% 11.9% 16.6%
Advertising as % of sales N. A. 8.0% 8.4% 10.0%
OPM (%) 8.5% 8.6% 7.4% 9.1%
Net profit growth (YoY) 3.4% 5.9% 4.2% 19.0%

What to expect?
Marico has declared an interim dividend of Re 1 per share. At Rs 125, the stock trades at 10.7x annualised 1QFY05 earnings and market cap. to sales of 0.7x. Keeping in mind the continuous double digit turnover growth that the company has been able to maintain, led by new products and international markets, the valuations look attractive. The management's continuous flow of bonuses and dividends is also a sign of shareholder friendliness.

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