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Marico: Not just oil - Views on News from Equitymaster
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Marico: Not just oil
Jul 25, 2007

Performance Summary
  • Topline growth of 26% YoY on a consolidated basis led by robustness in consumer products, international business and Kaya skin solutions.

  • Consolidated operating margins fall by 1% YoY, due to higher raw material and labour costs.

  • Consolidated bottomline grows by 33% YoY aided by lower depreciation and tax rates.

Consolidated picture
Rs(m) 1QFY07 1QFY08 (%) Change
Net sales 3,728 4,691 25.8%
Expenditure 3,165 4,031 27.4%
Operating profit (EBDITA) 563 660 17.3%
EBDITA margin (%) 15.1% 14.1%  
Other income 11 7 -34.6%
Interest 48 71 47.2%
Depreciation 112 58 -48.3%
Profit before tax 414 539 30.2%
Tax 111 136 23.0%
Profit after tax/(loss) 303 402 32.9%
Net profit margin (%) 8.1% 8.6%  
No. of shares (m) 58.0 609.0  
Diluted earnings per share (Rs)*   2.0  
Price to earnings ratio (x)*   27.3  
* 12 month trailing earnings

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 50% share (Parachute). In edible oils, the company’s brands, ‘Sweekar’ and ‘Saffola’ occupy the No. 2 position, with 13% share of the Rs 14 bn edible oils market. The company has also extended its ‘Parachute’ brand to the value added oil category (Parachute Jasmine). This brand is now No. 2 in the value-added 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).

In FY03, Marico entered the skin care-related businesses by acquiring 63% stake (currently over 75%) in ‘Sundari’ range of ayurvedic skin care products in the US (revenues US$ 1 m), as well as rolling out 27 skin care clinics under the brand ‘Kaya’. The company also recently acquired the ‘Nihar’, the hair oil unit of HLL, which has an annualised turnover of Rs 1.2 bn and operates in two segments – coconut oil and perfumed oil. This acquisition is a positive for Marico as it fits perfectly in its business portfolio.

What has driven performance in 1QFY08?
Sustained growth: Marico’s continued with its growth momentum in 1QFY08. The company recorded an increase of 26% YoY on a consolidated basis over the corresponding quarter in the previous year. Consumer products, international business and Kaya skin solutions all contributed to the growth. The company has been investing heavily in brand building for its flagship brands, which contributed 80% to the turnover in the June 2007 quarter. 20% organic growth was supported by 6% inorganic growth for the quarter under consideration. The standalone sales were up 16% YoY.

Standalone
Rs(m) 1QFY07 1QFY08 (%) Change
Net sales 3,408 3,961 16.2%
Expenditure 2,870 3,396 18.3%
Operating profit (EBDITA) 539 565 4.9%
EBDITA margin (%) 15.8% 14.3%  
Other income 11 26 123.7%
Interest 41 31 -24.0%
Depreciation 87 34 -61.1%
Profit before tax 422 526 24.4%
Tax 109 130 18.7%
Profit after tax/(loss) 313 396 26.4%
Net profit margin (%) 9.2% 10.0%  

Hair care: It’s flagship brand Parachute coconut oil yet again reported a double-digit volume growth. The company is increasing its market share in under penetrated areas through various micro-marketing initiatives. The brand’s market share in the 12 months ended May 2007 has improved to about 49% in volume terms. The company also expects copra prices in FY08 to be higher than in FY07 by about 5%. It has therefore effected a price hike of 3% in Parachute to offset the rising input costs. The focus segment of the hair-care range (Parachute Jasmine, Shanti Amla Badam, and Hair & Care) grew by 20% in volume terms (excluding Nihar). Together with Nihar, Marico commands 82% of the perfumed coconut oil market (12 months ended May 2007). Its post wash categories also did well with Silk n Shine’s and Parachute After Shower hair cream witnessing increase in market share.

Edible oil: Marico’s strategy to promote Saffola on a health consciousness platform has paid off with its franchise growing by 28% YoY in volume terms. Saffola Gold and Saffola Tasty witnessed higher growth rates. The consumer products division as a whole grew by 17% YoY during the quarter.

Kaya Skin Care: The skin care business recorded a 31% YoY growth in 1QFY08 and touched revenues of Rs 170 m. In the quarter, Kaya also prototyped a new service - Kaya Skin Lightening in Chennai and plans to launch it on a national basis. Two new products were also added to the Kaya range. Products contribute about 13% of Kaya’s revenues. In order to enhance this revenue stream, Marico has launched Kaya kiosks, at shopping malls to extend the reach of Kaya products and also to help drive footfalls to the clinics. Marico is also expanding its clinics to newer cities. Another initiative taken by Marico to expand its high margin business was to open Kaya Life (customized holistic weight loss solutions). It opened its first center in June 2007 in Mumbai. It plans to open 5 to 6 more centers during the year. Also it is expanding its Kaya Clinics to other cities in India and Middle East.

International business: Marico’s international business grew by 82% YoY during the quarter over 1QFY07 led by its acquisitions in Egypt. Marico’s market share (Fiancee + HairCode) has increased by about 1.8%, since the brands were acquired by it. Marico is now evaluating the options to export products from Egypt to neighboring African countries and India. Further a 24% YoY growth was witnessed from other regions excluding Egypt. The company is witnessing increase in market share across its product offerings in Middle East, Oman and Bangladesh.

Consolidated cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 51.3% 52.1%
Staff Cost 5.6% 7.3%
Advertising 13.0% 10.9%
Other Expenditure 15.0% 15.6%
Going forward, the company is planning to expand its market reach for its flagship products. It is also looking at rolling out new products and services in existing and new business segments and expand its international operations beyond the Gulf and Bangladesh. We believe that brand building of its flagship brands and nurturing new products would help the company witness a double-digit growth for the coming years.

On the margin front: On the consolidated basis, the margins fell by 1% YoY, due to higher raw material and labour costs. Raw material costs to sales were higher mainly on account of an increase in the prices of some of the edible oils. Personnel costs were up 62% YoY on basis of annual increments and higher headcounts. The advertising cost as a percent of sales fell from 13% in 1QFY07 to 10.9% in this quarter. Ad spends vary from quarter to quarter depending the product launch calendar and specific media plans for established brands. The management expects to maintain the advertising costs to sales ratio of about 12% to 13% for FY08. Even on the standalone basis, the margins have witnessed a fall by 150 basis points.

Lower depreciation and taxes boost net margins: The company’s bottomline grew by 33% YoY on a consolidated basis. The company had done financial restructuring in FY07 and hence the depreciation is lower by 48% YoY. The effective tax rate was also lower at 25% as compared to 26.8% in 1QFY07. However, from FY08, the company’s Parachute factory at Goa would be fully taxable (as against 30% of its profits being exempt from tax until last year). The company would continue to avail of the income tax exemption at its manufacturing units in Uttaranchal. Thus the effective tax rate going forward would be about 25%. On the standalone basis, the profits were up 26% YoY aided by lower interest and depreciation costs and higher other income.

What to expect?
At the current market price of Rs 55, the stock is trading at a price to earnings multiple of 14.5 times our FY10 estimates. The board has declared an interim dividend of Rs 13.5% per share of Re1 (dividend yield 0.2%). The company has identified new engines of growth and also is focusing on high margin products. It continues to improve its market share across product categories and is also doing well on the international business. The management’s uncommon thinking of transforming Marico from an oil company to a health and wellness firm is paying off well.

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