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Marico: All round performance - Views on News from Equitymaster
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Marico: All round performance
Oct 19, 2006

Performance summary
Edible and hair oil major, Marico, has reported yet another quarter of strong performance. The company’s topline and bottomline have grown by 38% YoY and 34% YoY respectively during 2QFY07. Growth has been aided by strong performances from both the domestic and international divisions. Further, savings across cost heads have helped the company in strongly expanding its operating margins by 5% during the quarter.

Consolidated picture
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 2,750 3,780 37.5% 5,458 7,508 37.6%
Expenditure 2,448 3,174 29.7% 4,860 6,340 30.5%
Operating profit (EBDITA) 302 605 100.3% 598 1,168 95.3%
EBDITA margin (%) 11.0% 16.0%   11.0% 15.6%  
Other income 8 1 -92.4% 26 11 -56.2%
Interest 6 57 806.3% 15 105 615.6%
Depreciation 77 127 65.9% 141 239 68.9%
Profit before tax 227 422 85.7% 468 836 78.5%
Tax 32 161 401.2% 65 272 317.5%
Profit after tax/(loss) 195 261 33.8% 403 564 39.9%
Net profit margin (%) 7.1% 6.9%   7.4% 7.5%  
No. of shares (m) 58.0 58.0   58.0 58.0  
Diluted earnings per share (Rs)*         18.2  
Price to earnings ratio (x)*         28.2  
* 12 month trailing earnings            

What is the company’s business?
Marico is the 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 edible oil market. The company has also extended its ‘Parachute’ brand to the value added oil category (Parachute Jasmine). This brand is now No. 2 in the value-added 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).

In FY03, Marico entered the skin care-related businesses by acquiring 63% stake (currently over 75%) 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 company also recently acquired ‘Nihar’, the hair oil unit of HLL, which has an annualised turnover of Rs 1.2 bn and operates in two segments – coconut oil and perfumed oil.

Standalone
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 2,525 3,412 35.1% 5,026 6,820 35.7%
Expenditure 2,225 2,855 28.3% 4,443 5,725 28.8%
Operating profit (EBDITA) 300 557 85.5% 583 1,095 87.9%
EBDITA margin (%) 11.9% 16.3%   11.6% 16.1%  
Other income 8 1 -85.5% 27 13 -52.8%
Interest -4 45 -1344.4% -5 86 -1820.0%
Depreciation 34 92 173.7% 84 178 112.3%
Profit before tax 279 422 51.3% 531 844 59.0%
Tax 30 155 410.2% 62 264 328.6%
Profit after tax/(loss) 248 267 7.5% 469 580 23.6%
Net profit margin (%) 9.8% 7.8%   9.3% 8.5%  

What has driven performance in 2QFY07?
All rounder: Marico has reported a strong 38% YoY growth in the consolidated topline for 2QFY07. This has been achieved by all round performance from all the business segments of the company viz. domestic, international and skin care solution (Kaya). The details are discussed hereunder.
  • Domestic front: Marico’s flagship brand, Parachute Coconut Oil, continued its good run as seen over the last few quarters. Volumes witnessed a 13% YoY growth during 2QFY07. Due to strong franchise expansion, the overall hair care range witnessed a 33% growth in volumes. In the edible oil segment, Saffola recorded a healthy growth of 20% YoY in volumes.

  • Focus brands: Consumer product business grew by 37% YoY led by an organic growth of 26%. The focus brands contributed nearly 78% of the group’s turnover in 2QFY07, up from 76% in 2QFY06. The company, over the last few quarters, has acquired brands like Camelia, Aromatic, Manjal and Nihar, which contributed to the inorganic growth of 11% YoY during 2QFY07.

  • International business: The company’s international business grew by 57% YoY during the second quarter The Middle East region clocked a growth of 64% YoY in value terms for 1HFY07. In Bangladesh, Parachute oil continued to dominate with 55% market share. The company in September 2006 had acquired Egyptian hair care brand Fiancée, who is the leader and commands a share of 30% in Egyptian hair care market.

  • Kaya: The company’s skin care business recorded a growth in turnover of 58% YoY during 2QFY07. Kaya now has 43 clinics in India and 3 in UAE and has a customer base of 0.1 m. The company expects Kaya to be cash positive by the end of this fiscal.

Cost savings power margins: In 2QFY07, Marico’s operating margins powered ahead by over 500 basis points (5%). The company’s raw material expense as a percentage of sales also saw a reduction at 49.5% (50.8% in 2QFY06). While employee costs stood at 7.1% of sales in 2QFY06, the figure this quarter was 5.6%. Other expenses were also lower (as a % of sales) in 2QFY07 as compared to 2QFY06.

Consolidated cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 50.8% 49.5% 53.6% 50.4%
Staff Cost 7.1% 5.6% 7.0% 5.6%
Advertising 12.8% 12.7% 11.4% 12.9%
Other Expenditure 18.4% 16.2% 17.1% 15.6%

Bottomline benefits: In 2QFY07, Marico saw a strong 34% YoY rise in its net profits. This was entirely driven by the higher operating margins. Other income fell by a significant 92% YoY, while tax outgo and interest expense rose 400%YoYand 800% YoY respectively.

What to expect?
At the current market price of Rs 512, the stock is trading at a price to earnings multiple of 28.2 times its trailing 12-month earnings. The board has declared an interim dividend of Rs 1.5 per share (dividend yield of 0.3%). The company has kept its course on its journey of sustainable and profitable growth. Marico has consistently sought to broadbase its brand basket. Despite 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.

The company has organised an analyst meet for tomorrow, i.e., October 20, 2006. We shall update our report on the company post the meet.

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