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Marico: Consistency prevails - Views on News from Equitymaster
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Marico: Consistency prevails
Oct 24, 2007

Performance summary
  • Organic growth of 16% accompanied by 7% inorganic growth leads to the topline growth of 23% YoY for 2QFY08.
  • Consolidated operating margins fall by 1% YoY due to higher raw material costs.

  • Consolidated bottomline grows by 97% YoY (excluding extraordinary items) aided by lower depreciation and tax expenses.

  • Standalone topline and bottomline grows by 13% YoY and 73% YoY for the quarter.

  • Board declares an interim dividend of Re 0.15 per share (dividend yield of 0.2%).

Consolidated picture
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 3,780 4,638 22.7% 7,508 9,329 24.3%
Expenditure 3,221 3,991 23.9% 6,431 8,022 24.7%
Operating profit (EBDITA) 558 647 15.8% 1,077 1,307 21.4%
EBDITA margin (%) 14.8% 13.9%   14.3% 14.0%  
Other income 1 5 766.7% 11 12 8.0%
Interest 57 65 13.7% 105 136 29.0%
Depreciation 127 64 -49.3% 239 122 -49.0%
Profit before tax 375 523 39.4% 744 1,062 42.7%
Extraordinary item 47 -   91 -  
Tax 161 101 -37.3% 272 237 -12.7%
Profit after tax/(loss) 261 422 61.5% 564 825 46.2%
Net profit margin (%) 6.9% 9.1%   7.5% 8.8%  
No. of shares (m) 609.0 609.0   609.0 609.0  
Diluted earnings per share (Rs)*         2.3  
Price to earnings ratio (x)*         26.7  
* 12 month trailing earnings

What is the company’s business?
Marico is the market 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 oils 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. This acquisition is a positive for Marico as it fits perfectly in its business portfolio.

What has driven performance in 2QFY08?
Topline scenario: Marico recorded over 20% YoY growth in its topline for the sixth consecutive quarter. The consolidated business grew by 23% YoY led by healthy growth across all its businesses of consumer products in India, international business and Kaya skin solutions. Organic growth of 16% was accompanied by 7% inorganic growth.

International business: Aided by Fiancee and HairCode, Marico’s International Consumer Products business grew by 73% YoY during the quarter. The acquisitions in Egypt are performing as per management expectations and are expected to deliver revenues to the tune of Rs 900 m for FY08. Marico is increasing its business in Egypt and is also exploring opportunities to increase exports from Egypt into neighboring countries and introduce products from India thereafter. Its business in Bangladesh grew by 20% YoY with Parachute coconut oil increasing its market share to 63% during the 12 months ended August ’07. The soaps franchise in Bangladesh (comprising Aromatic and Camelia) achieved a turnover of about Rs 34 m during the quarter resulting in a growth of about 12% YoY in 2QFY08.

Parachute cream continues to be the leader in the UAE. The brand’s market share in the UAE during the 12 months ended August 2007 was about 27%. It also gained ground in other parts of the Middle East such as in KSA and Oman where its shares are 19% and 13% respectively. Turnover from operations other than in Egypt registered a growth of 16% YoY during 2QFY08. However, rupee appreciation against the dollar reduced the revenues to that extent.

Kaya: During 2QFY08, Kaya recorded a turnover growth of 36% YoY. On a sequential quarter basis, the growth was 8%. The company added 2 clinics in India, one each in Mumbai and Pune. It has also tied up a few more properties for establishing new clinics. One clinic was added in the UAE during the quarter, taking the total number of clinics in the Middle East to six. It is planning to open its first clinic in Saudi Arabia shortly. Products formed around 15% of Kaya’s revenues. The company plans to launch new products in the coming quarters. Further, in June 2007, Kaya was extended beyond skin care solutions by way of Kaya Life centers, which offer holistic weight loss solutions that are customized to individuals. Kaya Life opened its first center at Juhu in Mumbai towards the end of last quarter. The company plans to open 3 to 4 more centers during the year.

Sundari: In line with the operating agreement with its joint venture partner, Shantih LLC, Marico has exercised its call option to raise its stake in its subsidiary Sundari LLC from 75.5% to 100%. With effect for October 23, 2007, Sundari has become a wholly owned subsidiary of Marico Limited.

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 3,412 3,858 13.1% 6,820 7,819 14.6%
Expenditure 2,902 3,342 15.2% 5,816 6,738 15.8%
Operating profit (EBDITA) 510 516 1.2% 1,004 1,081 7.7%
EBDITA margin (%) 14.9% 13.4%   14.7% 13.8%  
Other income 1 22 1733.3% 13 48 277.0%
Interest 45 27 -39.1% 85 59 -31.1%
Depreciation 92 37 -59.4% 178 71 -60.2%
Profit before tax 375 474 26.4% 754 999 32.6%
Extraordinary item 47 -   91 -  
Tax 155 93 -40.0% 264 223 -15.7%
Profit after tax/(loss) 267 381 42.6% 581 777 33.7%
Net profit margin (%) 7.8% 9.9%   8.5% 9.9%  

Indian operations: The sales grew by 13% YoY for 2QFY08. In the consumer products business, the flagship brand, Parachute Coconut Oil grew by 8% YoY in volume terms. Its market share in the 12 months period ending August ‘07 stood at 48% in volume terms. Along with Nihar, Marico now commands a 57% market share in the branded coconut oil market. The focus segment of the hair-care range (Parachute Jasmine, Shanti Amla Badam, and Hair & Care) grew by 15% YoY in volumes. Saffola, the company’s second flagship brand, reported a strong franchise growth of 21% YoY in volume terms led by higher growth in Saffola Gold.

The company’s post wash products are gaining market share. Silk n Shine brand has a share of 33% in the post-wash conditioner market, while Parachute After Shower hair cream now commands a 41% share of the hair creams market (during the 12 months ended August 2007). Though still in a nascent stage, the company expects the segments to do well going forward. The share of the Indian operations has fallen from 90% in 2QFY07 to 83% in this quarter. The move to enter newer regions and segments is paying off well for Marico. We continue to remain positive on the company’s growth prospects.

Consolidated cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 49.5% 51.6% 50.4% 51.9%
Staff Cost 6.8% 5.5% 6.8% 6.4%
Advertising 12.7% 13.0% 12.9% 12.0%
Other Expenditure 16.2% 15.9% 15.6% 15.8%

Input pressure: Marico witnessed a 1% dip in operating margins on a consolidated basis for the quarter. On a standalone basis, it dipped by 1.6% YoY. Material costs to sales were higher at 52% in 2QFY08 mainly on account of an increase in the prices of some of the edible oils other than copra on a YoY basis. While sunflower oil prices were up 20% YoY, safflower was up 30% YoY. Corn oil and rice bran oil were up 20% YoY and 25% YoY respectively. Copra prices remained flat. Staff cost provided some relief as it reduced from 6.8% of sales in 2QFY07 to 5.5% in this quarter. The margins are in line with our expectations.

Extraordinary effect: The company reported a 61.5% YoY rise in the net profits. This was mainly due to a lower depreciation charges and tax outgo. Excluding the extraordinary item (reversal in provision), the profits were up 97% YoY. Depreciation was lower due to financial restructuring. On a standalone basis, the profits, excluding the extraordinary item, were up 43% YoY. For the half year, (excluding the extraordinary item) the bottomline was up 75% YoY and 59% YoY on a consolidated and standalone basis respectively. The profits are in line with our expectations.

What to expect?
At the current market price of Rs 61, the stock is trading at a price to earnings multiple of 16.1 times our FY10 estimates. The company continues to deliver on the topline front. All its segments are witnessing strong growth. Its strategy to focus on growth, sustainability and profitability is paying off well. We shall put up further updates after the conference call scheduled on 25th October 2007.

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