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Marico: Robust sales but margins flat - Views on News from Equitymaster

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Marico: Robust sales but margins flat

Aug 9, 2014

Marico Limited has announced its first quarter results for financial year 2014-15 (1QFY15). The company has reported a 17% YoY increase in sales and 17% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Revenues excluding the Kaya business grew by 25% YoY on a 5% volume growth.
  • The company has barely managed to maintain operating margin as lower staff costs and other expenses has offset steep rise in raw material costs.
  • The net margin remained flat at 11.4% as reduced interest charges has been offset by higher tax outgo during the quarter.

Consolidated picture
(Rs m) 1QFY14 1QFY15 Change
Total income 13,824 16,231 17.4%
Expenditure 11,527 13,565 17.7%
Operating profit (EBDITA) 2,297 2,666 16.1%
EBDITA margin (%) 16.6% 16.4% -0.2%
Other income 139 183 31.4%
Interest 121 70 -41.8%
Depreciation 206 204 -1.1%
Profit before tax 2,109 2,576 22.1%
Extraordinary items 24 -  
Tax 512 678 32.4%
Profit after tax/(loss) 1,621 1,897 17.0%
Minority interest 44 44  
Net profit after tax/(loss) 1,577 1,853 17.5%
Net profit margin (%) 11.4% 11.4% 0.0%
No. of shares (m)   645  
Diluted earnings per share (Rs)*   7.5  
Price to earnings ratio (x)*   30.5  
* trailing twelve month earnings

What has driven performance in 1QFY15?
  • Marico clocked a 25% topline growth, excluding Kaya that got demerged effective 1st April 2013, backed by 28% growth in the domestic business and 16% rise in International business. Growth in the domestic business was led by double-digit growth across product categories. Among product segments, Parachute's rigid portfolio posted a strong growth of 41% driven largely by realizations which were up by 33% during the quarter. The volume growth has been muted at 6%. The Saffola edible oil franchise grew by 15% driven by 10% growth in offtake. The value added hair oils registered a 28% growth on a recovered volume growth of 11%. The acquired portfolio of Paras brands recorded a flat growth on a high base effect. Due to subdued offtake of coconut hair oil the overall volume growth for domestic business has slightly improved to 6% for the quarter.

  • Marico's international business recorded growth of 16% on a constant currency growth of 9.6%. The growth was aided by 14% and 18% (constant currency) growths registered in Bangladesh and Middle East and North Africa (MENA). Even the South African business grew by 9% during the quarter amidst challenging conditions of high inflation & interest rates, rupee depreciation, unemployment and sluggish demand. Even the business in Veitnam was flat due to economic slowdown.

    Cost break-up
    As a % of sales 1QFY14 1QFY15 gain/decline in basis points
    Raw material cost 48.5% 54.9% 635.66
    Staff costs 7.7% 5.3% -238.98
    Advertisement costs 12.7% 11.8% -90.17
    Other expenditure 14.4% 11.6% -287.72

  • Due to steep commodity inflation, the company has hardly managed to maintain operating margin during the quarter. During the quarter, price of largest input copra was higher by 131%. Even the prices of liquid paraffin and rice bran oil were higher by 14% and 12%, respectively. Only the price of safflower oil was lower by 24%. As a result, raw material to sales ratio has registered a jump of 6.4% during the quarter. This was partially offset by lower staff costs and other expenses. Even ad-spends to sales ratio was down by 0.9% for the quarter.

  • The net margin remained flat as reduction in interest charges has been offset by higher tax outgo. Excluding the impact of extraordinary income of Rs 24 m arising from the Kaya demerger in the year-ago quarter, the net margin shows a slight improvement to 11.4%.
What to expect?
Marico has been reporting faster growth in rural sales thanks to its efforts of increasing direct rural reach by 25% to 50,000 villages in the last two years. Presently rural sales account for 30% of overall sales. The company wants to raise rural contribution to 35% over the next two years. At the same time, Marico has increased direct coverage in top six towns by 60%. While in domestic markets Marico wants to focus on value-added products, the thrust in the international markets will be to cross-pollinate male grooming, hair nourishment and hair colour products.

At a price of Rs 270, the stock is trading at 23 times our FY17 estimated earnings. We had a given a SELL on this stock. At current price levels, the stock is overpriced. Therefore we maintain a SELL on the stock.

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