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Marico: Parachute-ing global skies! - Views on News from Equitymaster
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Marico: Parachute-ing global skies!
Aug 4, 2005

Performance summary
Edible and hair oil major, Marico had recently announced its results for the first quarter ended June 2005. It reported a decent topline and a comparatively better bottomline growth. Margin expansion to the tune of 170 basis points along with higher other income (profit on sale of residential premises) resulted in the bottomline growing by over 22% YoY.

Consolidated numbers…
(Rs m) 1QFY05 1QFY06 Change
Net Sales 2,439 2,729 11.9%
Expenditure 2,218 2,433 9.7%
Operating Profit (EBITDA) 221 296 33.9%
EBITDA margin (%) 9.1% 10.8%  
Other Income 3 18 496.7%
Interest 4 8 133.3%
Depreciation 31 65 108.7%
Profit before Tax and minority interest 189 241 27.1%
Minority interest 6 -  
Tax 25 33 29.9%
Profit after Tax/(Loss) 170 208 22.2%
Net profit margin (%) 7.0% 7.6%  
No. of Shares (m) 29.0 58.0  
Diluted Earnings per share (Rs)* 11.7 14.3  
P/E Ratio (x)   20.6  
*(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 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 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 (currently over 75% stake) 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 standalone picture…
(Rs m) 1QFY05 1QFY06 Change
Net Sales 2,319 2,522 8.8%
Expenditure 2,110 2,239 6.1%
Operating Profit (EBDITA) 209 283 35.4%
EBITDA margin (%) 9.0% 11.2%  
Other Income 3 18 500.0%
Interest 3 (1)  
Depreciation 25 51 104.0%
Profit before Tax 185 251 35.7%
Tax 26 31 19.2%
Profit after Tax/(Loss) 159 220 38.4%
Net profit margin (%) 6.9% 8.7%  
No. of Shares (m) 29.0 58.0  
Diluted Earnings per share (Rs)* 11.0 15.2  
P/E Ratio (x)   19.4  
*(annualised)      

What has driven performance in 1QFY06?
All-round growth aid topline:  Domestic market growth was fuelled by its flagship brand Parachute that grew by 9% YoY in volume terms, while maintaining its market share of over 50%. Also, high margin hair care products like Parachute Jasmine, Shanti Amla and Hair & Care grew by 7% in volume and 18% in value terms on a like to like basis. Anti-lice offering Mediker, where Marico commands a near 100% market share witnessed a strong 26% YoY in volume terms. Premium refined oil Saffola grew by 6% in volume terms.

International growth outpaces India:  Marico’s international business grew by 13% YoY, and was led by growth in Bangladesh where Parachute coconut oil now commands over 50% share. It must be noted that in 4QFY05, Marico acquired 2 soap brands in Bangladesh that are now sold through Parachute’s network and have also performed decently. UAE, another market where the company has decent foothold saw market share of Parachute Hair Cream cross 20%. It must be noted that Marico launched a host of new products like Silk-n-shine, Parachute Sampoorna and Saffola Gold, which received good response and lent a helping hand to the overall revenue growth.

Topline aids margin expansion:  As can be seen from the table below, material costs dipped by over 6% as percentage of sales mainly due to softening of raw material prices. However, staff cost saw a jump of 180 basis points, mainly due to expansion of Kaya clinics and due to the acquisition of the soap brands whose employees are now on Marico’s payroll. This is a sign of recovery in the FMCG sector, but at the same time, its new businesses (Kaya Skin Care and Sundari Llc) have yet to turn profitable and are currently eating some part of the consolidated company's profits.

Costs as a % of net sales
  1QFY05 1QFY06
Materials 61.3% 56.0%
Advertisement & Sales Promotion 10.0% 10.7%
Staff costs 5.1% 6.9%
Others 14.7% 15.6%
Total expenditure 90.9% 89.2%

Kaya and Sundari:  Kaya skin clinic business clocked a turnover of Rs 104 m during the quarter, up by over 240% YoY. However, this business is still in the investment phase and has eaten into the company’s profits to the tune of Rs 44 m. As per the management, this business will break-even during FY06, but in our view it is unlikely as fixed costs for this business are high and the company manages 37 such clinics with an aim to end the fiscal with 44 of them. However, Marico continues to receive overwhelming response for this venture.

Sundari, another of Marico’s global ayurvedic business, managed a turnover of Rs 15 mn, up by 50% YoY again on a low base. This venture also continues to eat into the company’s profits and the management has not indicated this business breaking even in the near future. We believe that the business will remain in an investment phase till FY07.

Over the last few quarters…
  1QFY05 2QFY05 3QFY05 4QFY05 1QFY06
Sales growth (YoY) 16.6% 14.9% 12.0% 12.6% 11.9%
Advertising as % of sales 10.0% 10.2% 9.8% 9.7% 10.7%
OPM (%) 9.1% 8.2% 8.7% 8.8% 10.8%
Net profit growth (YoY) 19.0% 19.6% 19.7% 18.3% 22.2%

What to expect?
At Rs 295, the stock is trading at a price to earnings multiple of 20.2 times our estimated FY07 earnings and price to sales of nearly 1.4 times. The board has declared an interim dividend of Rs 1.2 per share (dividend yield 0.4%). No doubt we are enthused by the company’s performance on the profit front, topline was strictly ok, nothing to be enthused about. There are better growth stories in the FMCG space. Inspite of keeping in mind the continuous double-digit turnover growth that the company has been able to maintain since the last couple of years, led by new products and international markets, the valuations look stretched at the current juncture.

We had recommended a ‘Sell’ on the stock in July 2005. We continue to believe that valuations already factor in the future growth, and hence in our view upside from the current price is very limited. The risk return profile is not in the favour of investors.

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