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Marico: Conference call extracts

Nov 25, 2010

We recently attended the 2QFY11 conference call of Marico. The company has done well during the quarter. Its top line grew by 12.5% YoY. However, the company's operating income grew by a muted 4.2% YoY. This was a result of higher raw materials prices ruling during the quarter. Bottom line of the company grew by 14.8% boosted by higher other income and a fall in depreciation costs. The key extracts are given hereunder:

Raw material concerns: Copra prices have been on the uptick recently. During 1QFY11, the prices increased by 4% YoY while for 2QFY11 the increase has been 26% YoY. The company to negate these increases took price hikes in 2 tranches. On a weighted average basis, the first hike was 5% across various SKUs while for the second tranche, it was 7% to 8%. This according to the company has neutralised increase in raw material costs. However, the effect of this would be seen in 3QFY11 as the increases were towards the end of the quarter. The company stated that it bases its price increases on the assessment of likely raw material movements over a six month period rather than on a short term view. The company believes that the prices peaked in September. Going forward, the prices are likely to ease from the current levels. However, this may not happen if the international prices of palm and palm kernel oil firm up. While the company does not intent taking any further price hikes, it may take price cuts if the prices in the loose oil market experience a fall. This would be done to maintain the threshold of premium over loose oil. Marico is clear on the stand that it wants its product pricing to be competitive so as to drive conversion from loose oil to branded oil.

Flexi-pack business: Flexi-pack business of Parachute oil makes up 25% of the brand's sales. The flexi-packs or pouches are sold primarily in the markets of South and West India and in the markets of Bihar. These pouches are of 50 ml and 100 ml size. They are positioned against the local brands but enjoy a premium over them. This is because the company wants to maintain margins and not go for only volumes. The company had passed on some amount of the increase in raw material costs to its customers. However, the loose oil players held on to their price points. This resulted in the company losing some volumes. While the loose oil players and local players have increased their prices, the effect of this will be visible in the December quarter results as the price differential between the two would have reduced. The company however, is looking to decrease its share of sales from flexi packs and is looking to position the rigid packs at price points to grow the loose to branded segment.

Emerging South African star: The company had entered South Africa in October 2007 with the acquisition of Enaleni. This company has 3 brands Caivil, Black Chic and Hercules. Through the restaging of these brands, innovation and increase in distribution, the business has progressed well. For the September quarter, Enaleni grew by around 30% YoY. The more recent acquisition in South Africa has been of Ingwe. The new company markets OTC brands and compliments Hercules in terms of products. It also provides synergies in terms of distribution network for Hercules. Ingwe is expected to do a business of Rs 170 -180 m on an annualised basis for the current year. On a consolidated basis, the South Africa consolidated entity is expected to do a business of around Rs 800 m. Marico now wants to make inroads in the sub-Saharan Africa regions.

Rethinking Kaya: Same store sales growth had fallen sharply due to the economic crisis. However, same stores sales growth for Kaya has improved from -13% in Q4FY10 to -11% in 1QFY11 and -6% in 2QFY11. The company expects positive same stores sales growth in 2HFY11. In fact, the company intends to concentrate on expanding its number of Kaya clinics and not scale up the Derma Rx franchisee as yet. The company had during the quarter shut down 6 Kaya clinics in India. On the other hand, it opened 4 clinics (1 in Bangladesh and 3 in Middle East). However, according to the management there is a need to redefine the Kaya model. For this, the company is looking to increase the contribution from product sales from the current 17% and sees Derma Rx as a fit in its strategy for this purpose.

What we expect?
At a price of Rs 135, the stock is trading at 24.3 times our FY13 earnings estimate. (RPro subscribers click here). The company has performed well during the quarter on strong volume growth and is seeing good traction in its edible oil, value added oil and international businesses. However, we believe the stock has most of the upside priced in. For this reason, we would advise investors to be CAUTIOUS on this stock.

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