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Marico: Inflation depresses margins
Aug 8, 2011

Marico Limited has announced its first quarter results for financial year 2011-2012 (1QFY12). The company has reported a 33% YoY and 15% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales surged by 33% YoY led by a 21% volume growth in its consumer care business.
  • Soaring commodity prices, shaved off 150 basis points from the operating (EBITDA) margin during the quarter. The raw material cost to sales ratio increased by 207 basis points YoY to 51.4%.
  • Net profit grew by a relatively slower 15% YoY due to a steep rise of over 30% YoY in each of the interest, depreciation and tax expenses. The effective tax rate in 1QFY12 rose to 20% from 18% in the year-ago quarter. Backed by two folds jump in other income, net profit margin was down by 126 basis points to 8%.

Consolidated picture
(Rs m) 1QFY11 1QFY12 Change
Net sales 7,874 10,486 33.2%
Expenditure 6,818 9,235 35.4%
Operating profit (EBDITA) 1,056 1,251 18.5%
EBDITA margin (%) 13.4% 11.9% -1.48%
Other income 43 90 107.5%
Interest 70 97 37.8%
Depreciation 120 169 40.3%
Profit before tax 909 1,075 18.3%
Extraordinary items - -  
Tax 162 210 30.1%
Profit after tax/(loss) 747 865 15.8%
Minority interest 10 15  
Net profit after tax/(loss) 737 850 15.3%
Net profit margin (%) 9.4% 8.1% -1.26%
No. of shares (m) 609 615  
Diluted earnings per share (Rs)* 4.88    
Price to earnings ratio (x)* 33.0    
* trailing twelve month earnings

What has driven performance in 1QFY12?
  • Marico recorded a strong growth of 33% over a robust 21% rise in offtake on a YoY basis . Higher volumes were achieved despite prices hikes effected over H2FY11. Average realisations of the products were up by 20-30% YoY. The growth spanned across all the three business units. The domestic consumer products business, contributing to 71% of sales, grew by 36% over a 15% volume rise on a YOY basis. Productwise, Parachute coconut oil, value added hair oil and Saffola franchise witnessed volume growth of 10%, 32% and 15% YoY, respectively in 1QFY12. The share of rural sales in overall domestic sales expanded to 30% from 27%.

  • The international business unit, with a 23% share in sales, clocked a 26% YoY growth boosted by the stake acquisition in International Consumer Products. Kaya's skin solution, the smallest business unit, saw its turnover rise by 24% YoY in 1QFY12. Around 5.6% of the business unit's growth was on account of the recently acquired Derma Rx business in Singapore. The company continued to unlock portfolio synergies by launching anti acne and anti ageing products from the Derma Rx brand. The share of products in skin solution turnover increased to about 19% from 13% in the year-ago level. Marico wants to raise the products share to around 25% of the skin solutions revenue over the next two years.
  • Cost break-up
    As a % of sales 1QFY11 1QFY12 Change
    Raw material cost 49.3% 51.4% 2.1%
    Staff costs 6.9% 6.7% 0.2%
    Advertisement costs 11.9% 9.8% 2.1%
    Other expenditure 16.6% 14.9% 1.7%

  • Operating profitability in 1QFY12 continued to be impacted by surging commodity prices. Average market price of its key raw material, coconut forming 40% of costs, zoomed ahead by 96% YoY. Even the other inputs such as kardi oil and rice bran were up by 27% and 45% Y0Y, respectively during the quarter. Consequently, its raw material to sales ratio was up by 210 basis points YoY to 51.4%. Marico liquidated higher amount of inventory, valued at Rs. 556 million in 1QFY12 as compared to inventory of Rs. 148 million liquidated in the year-ago quarter. Thus despite, lower advertisement spends & other expenditure (as percentage of sales), the operating margin contracted by 150 basis points YoY. The company has discontinued providing for disputed excise duty obligation reducing other expenses by Rs. 88.3 million during 1QFY12. The domestic FMCG business remained the most profitable with EBITDA margin of 13.7% while international business clocked EBIDTA margin of 10%. Kaya Skin solutions continued to be a drag on profitability but reduced its operating loss to 8% in 1QFY12 compared to 11% of turnover in the year-ago quarter.

  • At the net level, profits grew by a subdued 15% YoY in 1QFY12. Higher interest & depreciation charges coupled with increased tax incidence partially offset the two-fold jump in other income earned during the quarter. Interest outgo was up by 37.8% YoY due to increased borrowings for the International Consumer Products acquisition. Amortisation of intangible assets of overseas subsidiaries and consolidation of International Consumer subsidiary in 1QFY11, inflated depreciation charges by Rs. 33.2 million compared to the year-ago quarter. Tax outgo was higher by 30% YoY on higher effective tax rate.

What to expect?

At a price of Rs 154, the stock is trading at 26.6 times our FY13 estimated earnings. Marico has been a price warrior. Offtake of its products has been growing in robust double-digits inspite of price hikes undertaken during the 2HFY11. But higher realisations failed to plug in the unprecedented jump in commodity inflation, resulting in margin contraction. Marico has chosen to expand market share at the expense of margins. Barring short-term inflation woes, its long term growth strategy of expansion through low cost value packs, innovative and differentiated hair oil products, high rural penetration & extension of Saffola brand to other food categories holds good potential. However, currently the stock is fairly priced and we would advise investors to be CAUTIOUS.

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