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Marico: Subsidiaries burden the bottomline! - Views on News from Equitymaster
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Marico: Subsidiaries burden the bottomline!
Oct 25, 2005

Introduction to results
Edible and hair oil major, Marico announced its results for the second quarter ended September 2005. It reported a subdued topline and a comparatively better bottomline growth, backed by expansion in margins to the tune of 300 basis points. On a standalone basis, the company reported a bottomline growth of 49% YoY, backed by a 6% YoY topline growth.

Consolidated Picture
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 2,555 2,771 8.5% 4,994 5,499 10.1%
Expenditure 2,345 2,462 5.0% 4,563 4,894 7.2%
Operating Profit (EBDITA) 210 309 47.5% 431 605 40.5%
EBITDA margin (%) 8.2% 11.2%   8.6% 11.0%  
Other Income 4 8 88.1% 7 26 258.3%
Interest 6 6 3.3% 10 15 48.5%
Depreciation 31 77 146.8% 62 141 127.7%
Profit before Tax 177 234 32.6% 366 475 29.8%
Tax 21 32 55.8% 46 65 41.7%
Minority interest (7) -   (12) -  
Profit after Tax/(Loss) 163 202 24.3% 333 410 23.3%
Net profit margin (%) 6.4% 7.3%   6.7% 7.5%  
No. of Shares (m) 58.0 58.0   58.0 58.0  
Diluted Earnings per share (Rs)* 11.2 14.0   11.5 14.1  
P/E Ratio (x)         19.8  

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 market. The company has also extended its ‘Parachute’ brand to the value added oil category (Parachute Jasmine). The brand is now No. 2 in this 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). Over the past two years, Marico has entered the skin care-related businesses by acquiring 63% stake (currently over 75% stake) 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 standalone impression…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 2,399 2,546 6.1% 4,718 5,068 7.4%
Expenditure 2,208 2,246 1.7% 4,318 4,485 3.9%
Operating Profit (EBITDA) 191 300 56.8% 400 583 45.6%
EBITDA margin (%) 8.0% 11.8%   8.5% 11.5%  
Other Income 20 8 -58.7% 24 27 13.6%
Interest (2) 4   (5) 5  
Depreciation 24 34 39.6% 49 84 73.0%
Profit before Tax and minority interest 185 279 50.5% 370 530 43.4%
Tax 18 30 68.7% 43 62 42.3%
Profit after Tax/(Loss) 167 248 48.6% 327 469 43.5%
Net profit margin (%) 7.0% 9.8%   6.9% 9.3%  
No. of Shares (m) 58.0 58.0   58.0 58.0  
Diluted Earnings per share (Rs)* 11.5 17.1   11.3 16.2  
P/E Ratio (x)         17.3  

What has driven performance in 2QFY06?
Unenthusing topline: Domestic market growth was below expectations during the quarter. The company’s flagship brand, Parachute coconut oil grew by 9% YoY while increasing its market share to around 53%. Also, high margin hair care products like Parachute Jasmine, Shanti Amla and Hair & Care grew by 7% on a like-to-like basis. Anti-lice offering Mediker, where Marico commands a near 100% market share, witnessed a decent 9% YoY in volume terms. Premium refined oil Saffola grew by 11% in volume terms.

International business continues to outpace domestic growth: Marico’s international business grew by 7.5% YoY. It must be noted that in Bangladesh, Marico’s coconut oil market share jumped from 51% to 55% in the quarter. The aggregate international business of Marico, comprising the FMCG business, Kaya in UAE and Sundari in the US for the quarter grew by 9% YoY. The reason for slow growth in the overseas operations, mainly in UAE and other Gulf countries, was a planned change in distributors in Kuwait and UAE. However, the company has tied up with new distributors and sales in the second half of the year could see increased growth. Parachute Cream, a product offering targeted at the local Arab population, continues to do well and its market share in the UAE is now over 20%.

as a % of net sales 2QFY05 2QFY06 1HFY05 1HFY06
Cost of goods sold 62.8% 54.7% 62.0% 55.3%
Advertisement & sales promotion 10.2% 13.5% 10.1% 12.1%
Staff costs 5.5% 7.0% 5.3% 7.0%
Other expenditure 13.3% 13.7% 14.0% 14.6%
Total expenditure 91.8% 88.8% 91.4% 89.0%

Margin expansion saves the day: As can be seen from the table above, lower cost of goods saved the day for Marico, mainly arising from increase in stock of the previous quarter. Had this not been the case, bottomline growth would have been minimal. Also, all other expenses have increased considerably, especially advertising and staff costs, both during the quarter as well as 1HFY06, mainly due to expansion of Kaya clinics and due to the acquisition of the soap brands in Bangladesh, whose employees are now on Marico’s payrolls. The FMCG sector is on the path to recovery, but at the same time, its new businesses (Kaya Skin Care and Sundari LLC) have yet to turn profitable and are currently eating into some part of the company's consolidated profits. Also, depreciation during the quarter was considerably higher, mainly due to a change in accounting policy for some of Kaya’s assets.

Kaya and Sundari: During the September quarter, Kaya Skin Clinics clocked a turnover of Rs 106 m, up 214% YoY. However, this business is still in the investment phase and has eaten into the company’s profits to the tune of Rs 94 m. As per the management, this business will break-even during FY06, but in our view, it is unlikely, as fixed costs for this business are high and the company manages 39 such clinics with an aim to end the fiscal with 45 of them. However, Marico continues to receive overwhelming response for this venture.

Sundari, another of Marico’s global ayurvedic business, managed a turnover of Rs 29 m, up by 31% YoY, again on a low base, and a loss of Rs 45 m. This venture also continues to eat into the company’s profits and the management has not indicated of this business breaking even in the near future. We believe that the business will remain in an investment phase till FY07.

Over the past few quarters…
  2QFY05 3QFY05 4QFY05 1QFY06 2QFY06
Sales growth (YoY) 14.9% 12.0% 12.6% 11.9% 8.5%
Advertising as % of sales 10.2% 9.8% 9.7% 10.7% 13.5%
OPM (%) 8.2% 8.7% 8.8% 10.8% 11.2%
Net profit growth (YoY) 19.6% 19.7% 18.3% 22.2% 24.3%

What to expect?
At Rs 280, the stock is trading at a price to earnings multiple of 19.2 times our estimated FY07 earnings and price to sales ratio of nearly 1.3 times. The board has declared an interim dividend of Rs 1.4 per share (dividend yield 0.5%). No doubt we are enthused by the company’s performance on the profit front, but topline was strictly OK, nothing to be enthused about. There are better growth stories in the FMCG space. Inspite of 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.

We had recommended a ‘Sell’ on the stock in July 2005. We continue to believe that valuations already factor in the future growth, and hence in our view, upside from the current price is very limited. The risk return profile is not in favour of investors and is skewed towards risk.

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