• FEBRUARY 18, 2003

Marico: 'Oily' future

Marico Industries Limited, the edible oil major, has had an encouraging run in FY03 so far. During the first nine months of FY03 (9mFY03), the company has reported over 13% topline and an encouraging 17% bottomline growth on a consolidated basis (including 100% Bangladesh subsidiary). Marico Industries (excluding Bangladesh) reported 12% growth in both topline and bottomline during 9mFY03. Let's take a deeper look.

Consolidated picture…
(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net Sales 1,824 1,971 8.1% 5,068 5,741 13.3%
Other Income 12 14 12.2% 19 27 43.5%
Expenditure 1,643 1,776 8.1% 4,539 5,151 13.5%
Operating Profit (EBDIT) 182 195 7.3% 529 590 11.5%
Operating Profit Margin (%) 10.0% 9.9%   10.4% 10.3%  
Interest 12 3 -75.0% 33 12 -64.2%
Depreciation 32 113 250.8% 91 186 105.7%
Profit before Tax 149 92 -38.2% 424 419 -1.2%
Extraordinary income 0 78 - 0 78 -
Tax 28 31 10.9% 80 93 15.9%
Profit after Tax/(Loss) 122 139 14.5% 345 404 17.3%
Net profit margin (%) 6.7% 7.1%   6.8% 7.0%  
No. of Shares 14.5 29.0   14.5 29.0  
Diluted Earnings per share* 16.8 19.2   15.8 18.6  
P/E Ratio         9.1  

The company's topline graph has shown a declining trend. In the June quarter, Marico (consolidated) reported over 19% topline growth, which dipped to 13% in September quarter and finally 8% topline growth in December quarter. This depicts the difficult competitive environment. Also, surge in material costs put pressure on the company's operating margins. Raw material costs as a % of sales went up from 62.5% to 64.4% in 9mFY03 for the consolidated entity.

Costs as a % of net sales 3QFY02 3QFY03 9mFY02 9mFY03
Materials 62.9% 66.3% 62.5% 64.4%
Advertisement & Sales Promotion 10.6% 8.3% 9.3% 8.2%
Staff costs 4.4% 4.3% 4.8% 4.6%
Others 12.1% 11.3% 12.9% 12.4%
Total expenditure 90.0% 90.1% 89.6% 89.7%

The company received a one time compensation of Rs 45.6 m towards termination of its distribution alliance with P&G in the December quarter. Also, the company took advantage of the Maharashtra goverment's sales tax scheme under which the company prepaid Rs 49 m out of the total deferred sales tax of Rs 50 m outstanding as of March 31, 2002. This prepayment resulted in a one time gain of Rs 32 m for the company in 3QFY03. We have treated both as extraordinary income.

If we take out the extraordinary income, the consolidated profits actually fall by 5% in 9mFY03. The reason for this is a huge spurt in depreciation provisioning (up 106% YoY). Depreciation has gone up due to accelerated provisioning for certain software assets (Rs 56 m). In the December quarter, Marico acquired the brand ‘MealMaker' and related copyrights for a consideration of Rs 18 m. The company wrote off the entire brand and copyright value under depreciation provisioning during the aforesaid quarter. Extraordinary income in effect has been negated by higher depreciation provisioning. Net, net operational performance has remained more or less the same.

The Bangladesh picture…
(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Sales 64 100 55.3% 160 263 64.1%
Operating profit 6 26 317.7% 6 38 493.7%
OPM (%) 9.6% 25.9%   4.0% 14.4%  
Net profit 11 17 51.8% 5 24 406.2%
NPM (%) 17.1% 16.7%   3.0% 9.2%  

The company's Bangladesh performance has been pretty good considering the 64% growth in topline and and overall improvement in operating margins to 14.4% in 9mFY03. The company continues to be a zero debt company (i.e. it doesn't have interest bearing debt). Marico improved its overall market share in almost all categories. Over the years, Marico has reduced its dependence on the 'Parachute' brand from around 70% a few years back to around 40% of turnover currently. New product share in turnover is up from 11% in 9mFY02 to 16% during 9mFY03. The company has successfully managed to fight off FMCG major HLL's challenge and has infact consolidated its position.

Brand Category Market Share % Current Market Rank
  Dec'00-Nov'01 Dec'01-Nov'02
Parachute & Oil of Malabar Coconut Oils 54.4 55.1 1
Saffola & Sweekar Refined Oils in Consumer Packs 12.0 12.1 2
Total Hair Oils Hair Oils 10.2 13.7 2
Source: Company

At Rs 169 the stock trades at 9.1x annualised 9mFY03 earnings consolidated earnings, market cap to sales of 0.6x. Marico's ability to create successful brands, strong existing portfolio and its export thrust qualify it as a company with good growth potential. Valuations will reflect this potential going forward. However, in the short term, declining trend in topline is a concern.

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