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Marico: Margins improve on Kaya demerger - Views on News from Equitymaster
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Marico: Margins improve on Kaya demerger
Nov 8, 2013

Marico Limited has announced its second quarter results for financial year 2013-14 (2QFY14). The company has reported a 3.5% YoY fall in sales and 23% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Demerger of Kaya business has led to fall in consolidated revenues by 3.5% YoY in 2QFY14. During 1HFY14, the topline was down by 0.7% YoY.
  • However, a steep fall in employee costs and ad-spends (as a proportion of sales) led to a 2% YoY expansion in operating margin. For 1HFY14, the operating margin increased by 2.2% YoY.
  • Backed by reduction in interest costs and depreciation charges, the net profit surged by 23.3% YoY in 2QFY14. During 1HFY14, the profits grew by a steep 24.6% YoY.
  • The company has declared an interim dividend of Re 0.75 per share of face value of Re 1 each.
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Total income 11,595 11,184 -3.5% 24,298 24,138 -0.7%
Expenditure 10,073 9,499 -5.7% 20,907 20,232 -3.2%
Operating profit (EBDITA) 1,521 1,685 10.7% 3,391 3,905 15.2%
EBDITA margin (%) 13.1% 15.1%   14.0% 16.2%  
Other income 65 128 95.7% 184 270 46.5%
Interest 180 104 -42.6% 316 204 -35.4%
Depreciation 225 168 -25.3% 418 332 -20.5%
Profit before tax 1,182 1,541 30.4% 2,842 3,639 28.0%
Extraordinary items - -   - -  
Tax 293 431 46.9% 696 931 33.8%
Profit after tax/(loss) 889 1,111 25.0% 2,146 2,708 26.2%
Minority interest 30 52   49 96  
Net profit after tax/(loss) 859 1,059 23.3% 2,097 2,612 24.6%
Net profit margin (%) 7.4% 9.5%   8.6% 10.8%  
No. of shares (m)         645  
Diluted earnings per share (Rs)*         6.9  
Price to earnings ratio (x)*         30.2  
* trailing twelve month earnings

What has driven performance in 2QFY14?
  • The scheme of demerger of the Kaya business was sanctioned by the High Court with effect from April 2013. As a result the company's consolidated topline fell by 3.5% YoY during 2QFY14. Excluding the impact, revenues grew by 5% YoY driven by volume growth of about 4% in each of the domestic and overseas businesses. The domestic FMCG business registered a value growth of a mere 1% YoY. This was on account of low growth in the primary sale volumes particularly of Parachute due to a onetime paring down of stocks in the trade. Therefore Parachute sales were down by 6% YoY in value terms during the quarter. Even Saffola sales grew by a sluggish 3% due to price cuts of 2-3% undertaken during 4QFY13. However value-added hair oils grew by a robust 16% YoY in the quarter.

  • Marico's international business grew by 14% YoY in value terms led by 11% favourable exchange rate movement and 3% volume growth. Barring markets in Middle East and North Africa, all other markets registered growth. In Bangladesh, the company posted only 1% YoY growth due to adverse political conditions and sluggish domestic demand. Business in South Africa grew by 7% YoY as ethnic hair care segments witnessed decline. However, Vietnam continued to grow at a robust pace reporting a 21% YoY growth during the quarter.

    Cost break-up
    As a % of sales 2QFY13 2QFY14 gain/decline in basis points
    Raw material cost 48.6% 50.0% 138.59
    Staff costs 8.3% 7.2% -113.55
    Advertisement costs 13.7% 12.1% -158.69
    Other expenditure 16.2% 15.6% -60.76

  • On the back of a steep cut of 15%-17% YoY in each of the ad-spends and staff costs, the company's profitability improved significantly during the quarter. Commodity prices were a mixed bag with copra prices up by 29% YoY whereas prices of safflower oil and rice bran oil were lower by 21% and 15%, respectively on a YoY basis. Therefore raw material to sales ratio increased by 1.4% YoY during the quarter. The operating margin expanded by 2% YoY to 15%. The domestic business reported an operating margin of 17.6% whereas the international business clocked operating margin of over 16.7% during the quarter.

  • Net profits saw a jump of 23% YoY on the back of a sharp fall in interest charges and depreciation outgo. The tax incidence increased to 28% in 2QFY14 from 25% in 2QFY13.
What to expect?
Marico's sales growth has been hit by slowdown in discretionary spending. Even after excluding the impact of the Kaya de-merger, the company's sales grew by a mere 7% YoY in 1HFY14 with a paltry 5% YoY increase in the domestic FMCG business. However, overall growth has been propped up by favourable currency movements resulting in a robust 15% YoY growth in international sales. Among product segments in domestic FMCG business, sales of Parachute coconut oil have fallen by 4% YoY in 1HFY14 due to a poor 2% YoY rise in offtake. Sales of Saffola edible oil grew by a subdued 4% YoY on account of price-cuts taken earlier. However, value added hair oils has registered strong sales growth of 18% YoY in 1HFY14. Marico wants to introduce new products in the value added hair oil category.

At a price of Rs 209, the stock is trading at 21 times our FY16 estimated earnings. We had a given a SELL on this stock. At current price levels, the stock does not provide adequate margin of safety. Therefore we re-iterate a SELL on the stock.

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