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Marico: Annual report extracts - Views on News from Equitymaster
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Marico: Annual report extracts
Oct 7, 2010

Marico is one of the leading Indian groups in consumer products and services in the beauty and wellness space. It has products and services in hair care, skin care and healthy foods. Marico's brands and their extensions occupy leadership positions with significant market shares in all categories. The company is present in the skin care services segment through Kaya skin care clinics (99 clinics) in India and the UAE. Marico's branded products are also present in Bangladesh, other South Asian Association for Regional Co-operation (SAARC) countries and the Middle East. The company sold its Sundari business and Sil Brand in FY10. The company also acquired Code 10 in FY10. Code 10 is a Malaysia based hair gel and hair cream brand.

The company had a robust top line performance in FY10. Marico's sales grew by 11.4% YoY. The company's operating (EBITDA) margins increased by 1.4% to 14.1%. This came on the back of fall in raw material costs partly offset by higher advertisement spending. The company's bottom line as a higher operating income grew by 23.8% YoY during the year.

 

Sales of the company grew on the back of strong demand. Its volume growth during the year was 14%. However, the company had to take price cuts to remain competitive. This resulted in a negative value growth resulting in the topline growing by 11.4% YoY. The growth came on the back of strong demand for the company's coconut oil and value added oils. Saffola also saw good growth during the year. International business which now contributes 23% of the company's topline grew by 36% during the year. This consists of 21% YoY volume growth 9% YoY price let growth and 6% growth from favourable currency movement. However, the company did not fare well with its Kaya brand. Marico withdrew from its Kaya Life venture as the company felt that it was not scalable. Even in Kaya Skin Care, the company faced pressure as a result of the slowdown. Marico has identified declining customer retention and high skin practitioner attrition as two issues being faced by the company and is taking steps to remedy this.

The company during FY10 maintained its dividend per share at Rs 0.66 per share. On the other hand the dividend yield of the company fell shapely from 1.1% to 0.6% as the company's stock price moved up sharply during the year.


The company's ROE fell sharply by 6.7% to stand at 35% for FY10. This is due to a lower asset turnover and leverage ratio. However, operating efficiency for the company improved during the year.


Current ratio for the company increased from 2.1 to 2.2 times during the year. This is due to an increase in current assets as a result of inventory days increasing from 52 to 61 and debtor days increasing from 17 to 21 days. Creditor days on the other hand increased from 43 to 46 days.


The company during the year increased its debt levels by 19% YoY. However, the company's debt to equity level fell as a result of the company retaining a large portion of operating cash on its books instead of ditributing it as dividend.


Marico invested Rs 733 m in capex over the year. However, the company was not able to exploit the economies of scale as gross assets to sales increased by 0.7% YoY to stand at 19.9%.


What we expect?
At a price of Rs 135, the stock is trading at 24.6 times our FY13 estimated earnings (RPro subscribers click here). The company performed well during the year on strong volume growth. Furthermore, it is seeing good traction in its edible oil, value added oil and international businesses. However, we believe the stock has most of the upside priced in. This can also be seen from the company's forward PE chart. The stock is trading close to its historic high PE levels. Even the dividend yield of the company has fallen to almost half due to the run up in the counter. For this reason, we would advise investors to be CAUTIOUS on this stock.

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