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Marico: Fundamentals intact - Views on News from Equitymaster

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Marico: Fundamentals intact
Jul 24, 2008

Introduction to results
  • Consolidated topline grows by 28% YoY in 1QFY09 led by 29% YoY growth in the consumer division segment.

  • Consolidated operating margins decline by 1.5% YoY on account of higher raw material cost and ad spends.

  • Consolidated bottomline grows by 15%YoY in 1QFY09.

  • The standalone sales are up 26% YoY, while profits are down 2% YoY on account of lower margins and high interest expenses.



Rs(m) 1QFY08 1QFY09 (%) Change
Net sales 4,691 6,009 28.1%
Expenditure 4,031 5,253 30.3%
Operating profit (EBDITA) 660 756 14.6%
EBDITA margin (%) 14.1% 12.6%
Other income 7 10 42.9%
Interest 71 80 12.5%
Depreciation 58 75 29.1%
Profit before tax 538 612 13.7%
Tax 136 149 9.7%
Profit after tax/(loss) 402 462 15.0%
Net profit margin (%) 8.6% 7.7%
No. of shares (m) 609.0 609.0
Diluted earnings per share (Rs)* 2.9
Price to earnings ratio (x)* 19.8
* 12 month trailing earnings

What has driven performance in 1QFY09?
  • The topline on a consolidated basis grew by 28% YoY comprising of 15% YoY organic volume growth and 3% YoY inorganic growth accompanied by price led growth of 10% YoY. The standalone business grew by 26% YoY contributing 83% to the total sales (84% in 1QFY08). In the consumer products business, Parachute Coconut Oil in rigid packs grew by 8% YoY in volume terms, while the focus segment of the hair-care range grew by 26% YoY in volume terms. Nihar also recorded double-digit volume growth in the quarter under consideration. Saffola, its refined edible oil brand, yet again reported strong numbers with a 28% YoY franchise growth in volumes.

    Segment Revenue

      1QFY08 1QFY09 (%) Change
    FMCG 4,358 5,629 29.2%
    % of total revenue 92.9% 93.7%  
    Others 333 380 14.2%
    % of total revenue 7.1% 6.3%  
           
    Total 4,691 6,009 28.1%

  • Marico’s international business grew by 37% with the Middle East and Bangladesh continuing to perform well. In Bangladesh, Parachute coconut oil gained market dominance with the market share touching 69% in the 12 months ending May 2008. The Egyptian brands, Fiancée and HairCode continued to perform as per the management’s expectations and have a combined market share in Egypt of 62%. The company has also commenced exports of the products to neighbouring African nations. During 1QFY09, Marico South Africa, led by the brands Caivil, Black Chic and Hercules clocked a turnover of Rs 140 m. The international business now contributes 15% to the total revenues.

  • Kaya reported 62% YoY growth in 1QFY09, contributing 6% to the total sales (up from 4.7% in 1QFY08). The company opened 4 new clinics in 1QFY09, with three of these in the existing cities. Kaya is well on track to open about 15 clinics during the year.

  • On the margin front, the company witnessed pressure with a 2.6% YoY decline and 1.5% YoY decline on a standalone and consolidated basis respectively. Copra prices have increased by about 30% YoY. The company increased the Parachute prices during the end of April 2008 by about 5%, in addition to the 3% price hike taken last year. This 8% increase is expected to absorb about 16% increase in copra costs. The prices of the hair oils portfolio were also increased by 10% YoY to offset the impact of input cost pressures. Though the company has indicated it would further increase the prices if needed, on account of high competition and fear of slowdown in volumes, there is likely to be a lag in price increases. In the short term, therefore, a drop in operating margins cannot be ruled out.

  • The bottomline on a consolidated basis grew by 15% YoY in tandem with the growth in operating profits. The standalone profits fell by 2% YoY on account of lower operating margins and other income and higher interest costs. Its contribution to the total profits fell to 84% in 1QFY09 from 98% YoY in 1QFY08.

What to expect?
At the current market price of Rs 57, the stock is trading at a price to earnings multiple of 14.7 times our FY11 estimates. Though the company witnessed margin pressure and expects pressure to continue in the medium term, the management has indicated that it will attempt to maintain absolute unit margins across its portfolio of products. On the growth front, the fundamentals remain intact. The domestic and international segments are witnessing increasing market share and growth. The company continues to innovate and introduce new products. Though we are positive about the growth prospects of the company, valuations are on the higher side.

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