Dec 28, 2011|
Marico v/s Godrej Consumer: Which scores better?
Fast moving consumer goods (FMCG) span a whole gamut of daily consumables. Although FMCG companies differ widely in the consumer good segments they operate in, it is the strength and robustness of their business models that differentiates the leaders from the laggards. In this article we diagnose and compare the financial health of two mid-sized FMCG firms Marico and GCPL which have been expanding aggressively through the in-organic route.
Diverse business model advantage
Marico derives 72% of its revenues from edible oil and 20% from hair oils. It has two well-known domestic brands Parachute and Saffola and has acquired a clutch of international personal care brands such as 'Camelia', 'Aromatic' and 'Magnolia' in Bangladesh , 'Fiancee' and 'Haircode' in Egypt and hair care brand Code 10 in Malaysia, South Africa-based Ingwe range of immune boosters and International Consumer Products. The company provides skin care services through Kaya clinics in India and the UAE which constitute a miniscule 7% of consolidated sales.
Godrej Consumer Products (GCPL) predominantly present in personal wash segment through its Cinthol, Fairglow, Godrej No1 soap brands expanded in to household products in a big way in FY11 through the Sara Lee merger. The company now earns a sizeable 43% of revenues from repellants and other home care products while around 32% and 16% of sales are garnered from soaps and hair-colour segments. Like Marico, GCPL has acquired a number of overseas personal care brands such as UK based Keyline Brands and South African hair colour brands Rapidol & Kinky, insecticides Company Megasari based in Indonesia, hair colour companies Issue group & Argencos in Latin America & personal care company Tura in Nigeria.
Both the companies clock more than 60% of their sales from domestic operations and are thus insulated from global demand slowdown. But GCPL by virtue of its diversified product basket appears less vulnerable to growing competition.
Brown-field expansion drives growth
Both companies have grown at a robust pace backed by the string of acquisitions. But the addition of Hit and Good Knight brands in FY11 has accelerated GCPL's annual sales growth to 49% in the last three years. Marico grew at an average rate of 18% per annum during the three-year period.
GCPL enjoys a relatively high operating profitability. On an avearge, GCPL earned an operating margin of 18% vis-à-vis 13% clocked by Marico in the last three years. Lower raw material costs and advertisement spends have given a leg-up to GCPL's profitability. Agri-commodities are the principal inputs for both the companies. Oil & fats make up an average of 41% of the total raw material costs for GCPL. On the other hand, Marico's raw materials constituting oil & oilseeds comprise a huge 77% of the total raw material costs. Thus Marico is a heavily commodity-driven company as compared to GCPL. Moreover, Marico having a presence in the premium edible-oil category also spends an average of 12% of sales on promotions. GCPL's adspends form an average of 7% of sales.
Apart from superior operational performance, GCPL derives a huge cost benefit from lower tax incidence. As a majority of the company's plants are located in the excise-free zones of Himachal Pradesh and the north-east region, it attracts a low tax rate at an average of 17% of PBT. Marico has only one plant located in excise-haven Uttarakhand and as a result its average tax incidence is higher at 21% of PBT. Thus GCPL is a more profitable company and has earned net profits at an average of 17.5% of sales in the past three years. Marico recorded an average net profit margin of 8.6% in the three-year period.
The story so far....
Armed with a balanced business model and highly profitable operations, GCPL definitely scores higher than Marico. But a look at future prospects and return ratios based on current valuations will present a more realistic picture and determine which stock is worth investing from the long-term point of view. We shall discuss these aspects in the next article.
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