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Marico: Margins hit by input costs
Nov 20, 2014

Marico Limited has announced its second quarter results for financial year 2014-15 (2QFY15). The company has reported a 28% YoY increase in sales and 12% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 28% YoY in 2QFY15 on the back of 34% growth in domestic revenues. For 1HFY15, the topline registered growth of 26.5% YoY.
  • The operating margin contracted by 1.5% YoY in 2QFY15 due to sharp jump in input costs. For 1HFY15, the operating margin reduced by 1.1% YoY.
  • Net profits grew by a relatively subdued 11.7% YoY on a 15.7% YoY rise in operating profit in 2QFY15 due to higher tax outgo. For 1HFY15, net profits grew by 16.2% YoY.
  • The company has declared a first interim dividend of Rs 1 per share on a face value of Rs 1 per share.

Consolidated financial snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Total income 11,184 14,312 28.0% 24,138 30,543 26.5%
Expenditure 9,496 12,359 30.2% 20,226 25,924 28.2%
Operating profit (EBDITA) 1,688 1,953 15.7% 3,912 4,619 18.1%
EBDITA margin (%) 15.1% 13.6% -1.5% 16.2% 15.1% -1.1%
Other income 128 117 -8.4% 270 300 11.1%
Interest 104 51 -50.4% 204 122 -40.3%
Depreciation 171 205 19.8% 339 409 20.7%
Profit before tax 1,541 1,813 17.6% 3,639 4,389 20.6%
Extraordinary items - -   - -  
Tax 431 599 39.2% 931 1,278 37.3%
Profit after tax/(loss) 1,111 1,214 9.3% 2,708 3,111 14.9%
Minority interest 52 31   96 76  
Net profit after tax/(loss) 1,059 1,183 11.7% 2,612 3,035 16.2%
Net profit margin (%) 9.5% 8.3% -1.2% 10.8% 9.9% -0.9%
No. of shares (m)         645  
Diluted earnings per share (Rs)*         8.2  
Price to earnings ratio (x)*         40.2  
* trailing twelve month earnings

What has driven performance in 2QFY15?

  • Marico posted a 28% YoY topline growth backed by 34% YoY growth in the domestic business and 12% YoY rise in International business. Growth in the domestic business was led by price hikes taken across the portfolio to offset higher input prices. The volume growth improved to 8% YoY for the quarter. Among product segments, Parachute’s rigid portfolio posted a strong growth of 55% YoY driven largely by realizations as volumes were up by 7% YoY. The Saffola edible oil franchise grew by 18% YoY driven by 9.5% YoY growth in offtake. Saffola Oats recorded strong value growth of 31% YoY during the quarter. The value added hair oils registered a 33% YoY growth on a volume growth of 13% YoY. The acquired portfolio of Paras brands recorded a growth of 21% YoY during the quarter with Set Wet gels and hair serums further consolidating their leadership position.

  • Marico’s international business recorded growth of 12% YoY with constant currency growth of 16% YoY. The growth was aided by 17% and 24% (constant currency) growths registered in Bangladesh and Middle East and North Africa (MENA). Even the South African business grew by 12% (on constant currency) during the quarter amidst challenging conditions of high inflation & interest rates, rupee depreciation, unemployment and sluggish demand. The South East Asian business grew by a relatively subdued 4% during the quarter due to economic slowdown in Vietnam. The company is scaling up its presence in Malaysia, Myanmar and Cambodia.

    Cost break-up
    As a % of sales 2QFY14 2QFY15 gain/decline in basis points
    Raw material cost 50.0% 55.7% 574.23
    Staff costs 7.2% 5.8% -140.96
    Advertisement costs 12.1% 11.7% -38.95
    Other expenditure 15.6% 13.1% -249.11

  • The operating margin was hit strongly due to steep escalation in price of key inputs. The average market price of copra, the largest raw material, was up by 107% YoY during the quarter. Even the price of rice bran oil and HDPE were higher by 5% YoY and 13% YoY, respectively during the quarter. Consequently the raw material to sales ratio shot up to 55.7% in 2QFY15 from 50% in 2QFY14. The impact was partially offset by savings of 2.5% and 1.4%, respectively in ad-spends and other expenses (both as a proportion of sales). The operating margin contracted by 1.7% YoY during the quarter.

  • The net margin was down by 1.2% YoY during the quarter. The savings from a 50% reduction in interest charges was neutralized by higher interest outgo. The tax incidence rose to 33% in 2QFY15 from 28% in 2QFY14 due to phasing out of tax reliefs in India and Vietnam. Even the other income earned was lower by 8% during the quarter.
What to expect?
With a revival in urban demand in India, Marico’s direct distribution initiative through Project One is expected to drive volume growth in the metro markets. Through Project One, the company’s direct coverage in top six metros was scaled up by 60%. The company expects incremental business of Rs 50 m per month by the end of FY15 and additional annual business of Rs 1 bn by the end of FY16 through this initiative. In the international markets, cross-pollination of brands and expansion in adjacent markets in South East Asia will drive growth.

At a price of Rs 329, the stock is trading at 26 times our FY17 estimated earnings. We had a given a SELL on this stock. At current price levels, the stock is overpriced. Therefore we maintain a SELL on the stock.

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