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Marico: Its 'Kaya' improvement continues - Views on News from Equitymaster
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  • Nov 9, 2004

    Marico: Its 'Kaya' improvement continues

    Introduction to results
    Edible and hair oil major, Marico, has continued its double digit performance in the September quarter. The company has clocked nearly 15% growth in consolidated revenues led by strength in its consumer care business. Operating margins seem under some pressure as compared to last year. However, lower tax outgo helped the company post nearly 20% growth in bottomline. The company finished the first half of FY05 with nearly 16% revenue growth and 20% bottomline growth.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net Sales 2,223 2,555 14.9% 4,315 4,994 15.7%
    Expenditure 2,036 2,345 15.2% 3,932 4,563 16.0%
    Operating profit (EBDITA) 187 210 11.9% 383 431 12.5%
    EBDITA margin (%) 8.4% 8.2%   8.9% 8.6%  
    Other Income 7 4 -41.7% 14 7 -47.4%
    Interest 3 6 125.9% 8 10 32.0%
    Depreciation 34 31 -7.5% 64 62 -3.6%
    Profit before Tax and minority interest 158 177 11.6% 325 366 12.7%
    Minority interest 4 7 47.7% 10 12 29.2%
    Tax 27 21 -22.8% 57 46 -19.0%
    Profit after Tax 136 163 19.6% 278 332 19.7%
    Net profit margin (%) 6.1% 6.4%   6.4% 6.7%  
    Effective tax rate (%) 16.9% 11.7%   17.5% 12.6%  
    No. of Shares (m) 58.0 58.0   58.0 58.0  
    Diluted earnings per share* (x) 9.4 11.2   9.6 11.5  
    P/E ratio (x)   12.7     12.4  
    (* annualised)            

    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 55% market share (Parachute). In edible oils, the company’s brands ‘Sweekar’ and ‘Saffola’ occupy the No. 2 position, with 13% share of this 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 75.5% stake) in ‘Sundari’ range of ayurvedic skin care products in the US (revenues US$ 1 m), as well as rolling out 21 skin care clinics under the brand ‘Kaya’.

    What has driven performance in 2QFY05?
    Sales:  Growth was a mix of volume and value gains during the September quarter. Flagship brand 'Parachute' grew 14% in value terms, although volumes were nearly flat YoY. Value added hair oils portfolio (Parachute Jasmine, Hair & Care and Shanti Amla) largely led the growth for the company during the quarter. The folio grew by 22% in volume terms (27% value terms). In edible oils, Saffola franchise volumes grew by a strong 14% led by the launch of 'Saffola Gold' (a premium product). On the whole volumes grew by 8.5% on a like to like basis during the September quarter.

    Kaya plus Sundari
    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Kaya Clinic            
    Revenues 9.6 38.1 296.9% 14.7 67.9 361.9%
    Loss -12.1 -12.4   -20.5 -22.1  
    Sundari Llc            
    Revenues 9.2 11.2 21.7% 21 21.5 2.4%
    Loss -7.5 -11.4   -16.2 -18.2  
    Total revenues (Kaya + Sundari Llc) 18.8 49.3 162.2% 35.7 89.4 150.4%
    Total loss (Kaya + Sundari Llc) -19.6 -23.8   -36.7 -40.3  

    Marico's international business continued its enthusing run. The business grew by a strong 34% during the quarter and now contributes 10% to the company's consolidated turnover. In Bangladesh, Parachute consolidated its market leadership with a 48% share of the market (up from 39% in 2QFY04). Apart from this, its new businesses (Kaya Skin Clinics and Sundari Ayurvedic) more than doubled their combined turnover to nearly Rs 50 m during the quarter. The management is growing its Kaya Clinics network at a fast pace. It has opened 7 clinics each in Mumbai and Delhi, 2 in Pune, 3 in Bangalore and 2 in Dubai, taking the total Kaya Clincs to 21. It will soon be opening up branches in Hyderbad and Chennai too.

    Cost break-up
    as a % of net sales 2QFY04 2QFY05 1HFY04 1HFY05
    Total Cost of goods 63.2% 62.8% 63.1% 62.0%
    Staff Cost 5.1% 5.5% 5.2% 5.3%
    Advertising 9.4% 10.2% 8.8% 10.1%
    Other Expenditure 13.9% 13.3% 14.1% 14.0%
    Total Expenditure 91.6% 91.8% 91.1% 91.4%

    Operating margins:  Increase in advertising costs as percentage of sales to over 10% during the quarter and the half year period, seems the key reason for the marginal dip in operating margins. However, total cost of goods and other expenditure were down marginally. The growth of nearly 20% in bottomline was largely driven by the strength in the topline. Lower tax provisioning added to the company's profit growth. Though new businesses of Kaya Clinics and Sundari Ayurvedics continued to eat into the consolidated profits (combined losses stood Rs 24 m in 2QFY05), the businesses are improving operationally. The quantum of losses has reduced when compared with the growth in revenues.

    Over the last five quarters
      2QFY04 3QFY04 4QFY04 1QFY05 2QFY05
    Sales growth (YoY) 15.2% 17.4% 11.9% 16.6% 14.9%
    Advertising as % of sales 9.4% 8.0% 8.4% 10.0% 10.2%
    OPM (%) 8.5% 8.6% 7.4% 9.1% 8.2%
    Net profit growth (YoY) 3.4% 5.9% 4.2% 19.0% 19.6%

    What to expect?
    Marico has declared its second interim dividend at Rs 1.2 per share. At Rs 142 the stock trades at 12.4 times annualised 1HFY05 earnings and market cap. to sales of 0.8x. Keeping in mind the continuous double digit turnover growth that the company has been able to maintain, led by new products and international markets, the valuations look attractive. The management's continuous flow of bonuses and dividends is also a sign of shareholder friendliness.



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