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Marico: Margins continue to be hit
Nov 10, 2011

Marico Limited has announced its first quarter results for financial year 2011-12 (2QFY12). The company has reported a 25.6% YoY and 9% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales increased by 25.6% YoY led by a 44% growth in turnover from domestic consumer care business. During H1FY12, sales grew by 29.4% backed by 30.5% jump in consumer care sales.
  • Operating profitability continued to bear the brunt of high commodity prices and slid by 81 basis points during the quarter. The operating margin declined by 115 basis points in H1FY12.
  • Growth in earnings slackened to a mere 9.4% on higher interest charges and tax outgo. For H1FY12, growth in net profit was better at 12.4% backed by 69% jump in other income.

Consolidated picture
(Rs m) 2QFY11 2QFY12 Change H1FY11 H2FY12 Change
Net sales 7,758 9,745 25.6% 15,632 20,231 29.4%
Expenditure 6,767 8,578 26.8% 13,585 17,813 31.1%
Operating profit (EBDITA) 991 1,167 17.7% 2,047 2,418 18.1%
EBDITA margin (%) 12.8% 12.0%   13.1% 12.0%  
Other income 73 106 46.6%    116    196 69.3%
Interest 65  91 40.8%    135    188 39.3%
Depreciation 140 177 26.9%    260    346 33.1%
Profit before tax 860 1,005 16.9% 1,768 2,080 17.6%
Extraordinary items   -     -   -   
Tax 126 205 62.4%    288    416 44.3%
Profit after tax/(loss) 733 800 9.0% 1,480 1,665 12.4%
Minority interest 18  17        27      32  
Net profit after tax/(loss) 716 783 9.4% 1,453 1,633 12.4%
Net profit margin (%) 9.2% 8.0%   9.3% 8.1%  
No. of shares (m) 609 615   609 615  
Diluted earnings per share (Rs)* 4.88       4.9  
Price to earnings ratio (x)* 31.6       30.6  
* trailing twelve month earnings

What has driven performance in 2QFY12?
  • Aided by a mix of volume and price, Marico posted 26% sales growth in 2QFY12. Though the company did not raise prices during the quarter, its realisations were higher on account of price-hikes undertaken in H2FY11. Its domestic consumer care business, the largest unit with 71% sales share, saw offtake grow by 14% despite prices being 26% higher than year-ago levels. Product wise, flagship product Parachute clocked volume growth of 10% on higher demand for small packs, value-added oils garnered market share gains on differentiated positioning and Saffola oils posted volume franchise expansion of 11% during the quarter. International operations, the second largest business unit contributing 23% to consolidated sales grew by a slower 19% on account of the weakening rupee. Kaya skin solution, the smallest business unit clocked 16% rise in collections on same store basis translating in revenue growth of 7% in 2QFY12. Thus growth in business of all the three divisions led to the overall topline growth.

    Cost break-up
    As a % of sales 2QFY11 2QFY12 gain/decline in basis points
    Raw material cost 50.0% 54.7% 470
    Staff costs 7.5% 7.4% -10
    Advertisement costs 12.2% 9.7% -250
    Other expenditure 17.5% 16.2% -130

  • The conscious decision taken by Marico not to hike prices further to prevent demand erosion has led to good volume growth in 2QFY12. But as commodity prices continued to rule higher on a year-on-year basis, the company’s profitability was dented during the quarter. Price of key raw material coconut was 50% higher YoY. Other edible oils such as palm oil and rice bran oil hovered at 30% and 46% higher price levels respectively. Resultantly, Marico’s cost of goods sold to sales ratio shot up by 470 basis points to 54.7% in Q2FY12. The company cut down its ad spends with its proportion in sales dropping to 9.7% from 12.2% in the year-ago quarter. Even other expense-to-sales ratio was down by 130 basis points. However these cost control measures were insufficient in offsetting the steep commodity inflation and operating margin contracted by 81 basis points during the quarter. Kaya skin solution booked a loss of Rs 75 m compared to profit of Rs 15 m in the year-ago quarter. The loss was due to rationalization & automation of the practice of revenue deferrals on sale of packages and amortization of intangible assets amounting to Rs 12 m.

  • The company’s earnings have grown by a relatively tepid 9.4% YoY in 2QFY12. Slower growth in operating income coupled with high interest and tax outgo resulted in slack earnings. Interest charges grew by 40.8% YoY. Tax expenditure was up by 62.4% YoY on account of reversal of tax charge in the year-ago period. Even depreciation charge was up by 26.9% YoY due to of amortisation of Rs 26 m on intangible assets and accretion of fixed assets of the acquired International Consumer Products in Veitnam. These cost-push pressures were partially offset by a 46.6% YoY rise in the other income earned by the company during the quarter.

What to expect?
At a price of Rs 150, the stock is trading at 20.8 times our FY14 estimated earnings. Marico’s profitability has been under cloud for the past two quarters due to hardening commodity prices. The company raised prices in H2FY11 which offset the cost pressures but only partially. Even as commodity inflation has shown signs of softening, it continues to remain high on a YoY basis. The company has decided to protect its turf by holding prices and so margins are likely to be squeezed in the near term.

But the redeeming factor is the broad-based growth recorded by all the divisions. Aided by expansion in rural distribution, Marico’s rural sales (30% of overall sales) are growing faster than urban sales. Its sales in modern trade surged by 46% in 2QFY12 backed by good growth from Saffola and hair oils. Its future growth plans remain firmly on track. Its flagship product Parachute coconut hair oil is a market leader in India (share 53%) and Bangladesh (share 69%). The company has extended the brand to skin care by launching Parachute Advanced Body Lotion. Its other flagship product, Saffola in premium refined edible oil market dominates with a 55% market share. The company has four blended variants with a presence across price points. It recently launched Saffola oats under the mother brand which has met with reasonable success cornering 10% market share and is among the top three players. Marico has introduced affordable services in Kaya skin care for higher footfalls and launched skin products from Derma Rx in India. This division is likely to break even in future. Thus the long term potential of the stock remains bright. But at current valuations, the stock is overpriced and a correction of at least 25% will warrant a buy.

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