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Marico: Pricing pressure

Aug 6, 2001

Edible oil major, Marico, has recently declared its first quarter FY02 results. It declared a marginal 1.3% growth in sales YoY and over 7% growth in its bottomline.

(Rs m) 1QFY01 1QFY02 Change
Net Sales 1,468 1,487 1.3%
Other Income 6 7 21.4%
Expenditure 1,306 1,323 1.3%
Operating Profit (EBDIT) 162 164 1.4%
Operating Profit Margin (%) 11.0% 11.0%  
Interest 10 8 -21.0%
Depreciation 28 22 -20.3%
Profit before Tax 130 141 8.7%
Tax 11 11 -4.4%
Deffered tax provision 0 3  
Profit after Tax 118 127 7.4%
Net profit margin (%) 8.1% 8.5%  
Effective tax rate (%) 8.7% 7.7%  
No. of Shares (eoy) (m) 14.5 14.5  
Diluted earnings per share* 32.6 35.0  
P/E ratio   7.0  
(* annualised)      

At first glance the turnover growth looks discouraging. However, according to the company, the volume growth was significant, but due to lower product prices, the value figures were depressed. Infact, in 1QFY02, the coconut oil segment (Parachute and Oil of Malabar) grew by 9% and the refined oils (Saffola and Sweekar) have grown by 15% YoY in volume terms.

The realisations of Parachute coconut oil were lower in 1QFY02. For example, the maximum retail price (MRP) of the largest selling pack (200 ml bottle) in 1QFY02 was lower at Rs 22, as compared to Rs 26 per bottle during 1QFY01.

(Rs m) 1QFY01 1QFY02 Change
Raw material consumed 740 792 6.9%
Packing material consumed 159 169 6.4%
Staff cost 74 85 14.9%
Advertising and sales promotion 144 130 -9.9%
Other expenditure 178 180 1.2%

Added to that, sales of P&G (Proctor and Gamble) products fell, primarily because P&G withdrew the brands Clearasil/Ultra Clearasil (divested) and Camay Soap (discontinued) from the distribution agreement.

Marico's net profit growth would have been higher, but the company changed its inventory valuation method from first in first out (FIFO) to weighted average cost. Otherwise, instead of a 7% net profit growth, the company would have reported a 10% growth YoY.

The company's advertising costs declined 10% YoY, but its staff costs increased nearly 15% during the quarter. Decline in Marico's interest and depreciation costs also contributed to the overall profit growth.

At the current market price of Rs 244 the stock trades at a P/e multiple of 7 times its 1QFY02 annualised earnings. The valuations are on the lower side of the FMCG spectrum. Given the company's focus on the edible oil business and its ability to maintain its market share and growth despite HLL's entry into the segment, the company should have been rated higher. But concerns are that in these difficult market conditions, Marico, may continue to face pressure of pricing power. Though in this quarter, its expenditure has been under control due to lower advertising costs, competitive pressures and a difficult market may see an escalation in these costs in the coming quarters.


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