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MARICO
Impressive performance in Challenging times
Robust revenue on back of strong volume growth
Marico’s Q3FY11 revenue rose ~22.1% Y-o-Y to INR 8.17 bn versus our estimate
of INR 7.8 bn. Volume growth was robust at 15% Y-o-Y. PAT jumped 11.8% Y-o-
Y to INR 695 mn (our estimate INR 640 mn).
Parachute and Saffola volumes sturdy
Parachute and Saffola volumes grew ~5% and 13% Y-o-Y, respectively. The
company’s international business continued to surge, up ~33%
Y-o-Y, driven by ~25% volume- and ~8% price-led growth. However, due to 5%
INR appreciation, overall reported growth was 28%.
Kaya: Jump in revenue; international business shines
Kaya skin clinics posted revenue growth of 40% Y-o-Y to INR 620 mn in Q3FY11,
bolstered by same store clinic sales growth of ~11% Y-o-Y (reversal in trend
with ~3% same clinic decline in previous quarter). Kaya (excluding Derma Rx)
incurred a loss of INR 9 mn at the PBT level (against INR 35 mn loss in Q2FY11).
In Q4FY11, while Kaya plans to add one-three clinics in the Middle East, it is
unlikely to open any new clinic in India. In Q3FY11, one clinic was opened in
Middle East. As per the company, acquisition of Derma Rx helped Kaya business
post operating profit of INR 41 mn.
EBITDA flat; margins decline
Marico earned EBITDA of INR 997 mn during the quarter. EBITDA margin dipped
256bps Y-o-Y. Lower A&P, staff costs, and other expenditure contributed 176bps,
27bps, and 77bps, respectively. These savings were offset by higher COGS,
which jumped 536bps in Q3FY11. The company’s primary focus is on growing its
brand franchise rather than increasing margins.
Outlook and valuations: Fairly valued over near term; maintain ‘BUY’
The company is eyeing growth through low unit packs (LUPs), rural markets,
focus on non-coconut hair oil and new product initiatives in the food segment
under Saffola. Kaya’s domestic business, which we believe is an overhang in the
near term, is a key concern. However, reversal in trend is visible. Also, the
previous price hike (~7% in December) taken by the company had minimum
impact in Q3FY11 due to low priced inventory pipeline; in Q4FY11, the company
will reap full benefit of the same. Also, Marico expects copra price to correct in
the near future. Hence, we maintain ‘BUY’ recommendation on the stock. On
relative return basis, the stock is rated ‘Sector Performer’.
Key takeaways from conference call
• Parachute and Saffola volumes sturdy: Parachute and Saffola volumes grew ~5%
and 13% Y-o-Y, respectively.
Saffola’s Y-o-Y volume growth dropped in Q3FY11 vis-à-vis Q2FY11 primarily on
account of reduced promotions with ~35% Y-o-Y reduction in promoted product
volumes.
The company’s international business continued to grow handsomely, up ~33% Y-o-
Y, driven by ~25% volume growth and ~8% price-led growth. However, due to 5%
INR appreciation, overall reported growth was 28%.
The company’s major focus in the medium term will be on growing volumes.
Management is confident of achieving 7-8% volume growth annually.
• EBITDA flat; margins decline: Marico posted EBITDA of INR 997 mn. EBITDA
margin dipped 256bps Y-o-Y. Lower A&P, staff costs, and other expenditure
contributed 176bps, 27bps, and 77bps, respectively. These savings were offset by
higher COGS, which jumped 536bps in Q3FY11. The company’s primary focus is on
growing its brand franchise rather than increasing margins.
• Copra prices: Copra prices during Q3FY11 were abnormally higher at ~62% over
Q3FY10. The company believes prices have peaked and could correct in the near
future, another testimony to this belief is that the company has considerably reduced
its copra inventory to less than one month (its normal inventory level for copra).
• Saffola raw materials: Prices for two of Saffola’s key inputs, safflower oil and rice
bran oil, declined ~3% Y-o-Y and increased ~25% Y-o-Y, respectively.
• Price hikes: Due to raw material inflation, Marico has taken a price hike of ~12% in
edible oil in Q3FY11; it could look at some more hikes if required. The company has
taken average price increase of ~ 24% till date in five months since August (5% in
August; 8% in October; 5% in November, and further 7% in December). However,
the last price hike (~7% in December) taken had minimum impact in Q3FY11 due to
low priced inventory pipeline; in Q4FY11, the company will reap full benefit of the
same. This is expected to compensate for a significant portion of raw material
inflation.
• Cooling oil: Cooling oil has been successful in Andhra, capturing 7-8% market share
in value terms. The company has expanded it to adjoining southern states—Tamil
Nadu and plans to launch it in Karnataka during the summer.
• Brand strategy in hair oils: For Marico a choice between Parachute and Nihar will
be based on brand strength in a particular geography. Parachute is stronger in South
and West India, while Nihar is stronger in Bihar and UP.
• Market share: The company’s hair oils franchise had a volume market share of
~22% during the 12 months ended November 2010. The share has grown from
~17% about four years ago. There has been a 140bps gain Y-o-Y.
• Rural focus: Rural sales grew ~28% Y-o-Y in Q3FY11, while urban sales have lagged
at ~17% Y-o-Y. The share of rural sales to total has grown to ~27% in Q3FY11.
• Provisioning for excise: The company continues to provide for 75% of duty
payable on coconut oil packs of up to 200 ml. Provision for Q3FY11 is INR 96 mn
(Q3FY10 INR 110 mn) and was INR 294 mn in FY10.
• Kaya: Kaya skin clinics posted revenue growth of 40% Y-o-Y to INR 620 mn in
Q3FY11, bolstered by same store clinic sales growth of ~11% Y-o-Y ( reversal in
trend with ~3% same clinic growth decline in previous quarter). Kaya (excluding
Derma Rx) incurred a loss of INR 9 mn at the PBT level (against INR 35 mn loss in
Q2FY11). In Q4FY11, while Kaya plans to add 1-3 clinics in the Middle East, it is
unlikely to open any new clinic in India. In Q3FY11, one clinic was opened in Middle
East. As per the company, acquisition of Derma Rx helped Kaya business post
operating profit of INR 41 mn. We expect revenue growth in the domestic business to
improve in Q4FY11 due to low base.
• Saffola rice and oats: The company is satisfied with current performance and
expects INR 400-450 mn of sales in FY12E. It expects food to account for 20-25% of
Saffola brand over the long term. Packaged rice is an INR 4 bn market and is growing
at 25% CAGR.
• International segment: The company’s international business continued to grow
handsomely in Q3FY11, registering ~33% top line growth over Q2FY10, driven by
~25% volume growth and ~8% price-led growth. MENA will contribute 35% to
internationals sales (i.e., INR 2,750-3,000 mn) in FY12E and the company expects
Malaysia to contribute ~INR 200 mn in FY12E. International businesses in
Bangladesh, Egypt, Middle East, and Derma Rx business yield higher margins
primarily on account of tax benefits and completely integrated manufacturing.
• Sales from Africa: Marico expects INR 800 mn sales in FY11E and INR 1,000 mn
plus in FY12E. Growth rates have been ~30% Y-o-Y.
• Tax rate: Likely to be 16% in FY11E and 18-20% in FY12E. Tax rates will jump in
FY12 as some areas will move out of tax shelters.
Company Description
Marico has evolved into one of the leading Indian FMCG companies from a coconut oil
manufacturer over the past few years. It has positioned itself on the beauty and wellness
platform and caters to hair care, health care, and skin care. Its brands include
Parachute, Nihar, Hair & Care, and Fiancee in hair care, Saffola, Sweekar and Ingwe in
health care and Kaya in skin care. The company has been at the forefront of launching
innovative products and services such as Saffola Cholestrol Control Atta Mix and Kaya
Skin clinics to provide Indian consumers with premium personal care products. Over the
past two years, Marico has captured inorganic growth opportunities to spread its base
across geographies and increase the range of products at its disposal. It has acquired
two hair care brands in Egypt, Fiancee and Haircode, which give it control of 50% of the
hair care market in the country. Further, it has acquired three soap brands in Bangladesh
and skin care brand Derma Rx in Singapore to expand its presence there.
Investment Theme
Marico is amongst the leading beneficiaries of the changing preference of health
conscious Indian consumer for better personal care products and services. The company
has been able to distinguish itself by offering niche products and services through brands
such as Saffola, and Kaya, while extending Parachute to various new generation hair
care products such as hair creams and value-added hair oils. Kaya has gained an
impressive premium positioning by offering an impressive bouquet of skin care services
along with extensive care.
Key Risks
Coconut oil forms the biggest share of Marico’s top line and bottom line. Copra prices
have been hardening over the past few months. A greater-than-expected inflation can
hurt the bottom line substantially.
Following the acquisition of highly profitable brands in Egypt and soap brands in
Bangladesh, Marico expects ~20% of its revenue and substantial share of profits to come
from these countries. Appreciation of rupee against Egyptian pound or Bangladeshi taka
puts the growth in revenues and profits at risk.
Marico had been earning excise benefit due to classification of coconut oil under excise
free items. Recent change in this classification by Central Board of Excise and Customs
(CBEC), currently challenged by the company in Court, could impact the company’s
profits negatively.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
MARICO
Impressive performance in Challenging times
Robust revenue on back of strong volume growth
Marico’s Q3FY11 revenue rose ~22.1% Y-o-Y to INR 8.17 bn versus our estimate
of INR 7.8 bn. Volume growth was robust at 15% Y-o-Y. PAT jumped 11.8% Y-o-
Y to INR 695 mn (our estimate INR 640 mn).
Parachute and Saffola volumes sturdy
Parachute and Saffola volumes grew ~5% and 13% Y-o-Y, respectively. The
company’s international business continued to surge, up ~33%
Y-o-Y, driven by ~25% volume- and ~8% price-led growth. However, due to 5%
INR appreciation, overall reported growth was 28%.
Kaya: Jump in revenue; international business shines
Kaya skin clinics posted revenue growth of 40% Y-o-Y to INR 620 mn in Q3FY11,
bolstered by same store clinic sales growth of ~11% Y-o-Y (reversal in trend
with ~3% same clinic decline in previous quarter). Kaya (excluding Derma Rx)
incurred a loss of INR 9 mn at the PBT level (against INR 35 mn loss in Q2FY11).
In Q4FY11, while Kaya plans to add one-three clinics in the Middle East, it is
unlikely to open any new clinic in India. In Q3FY11, one clinic was opened in
Middle East. As per the company, acquisition of Derma Rx helped Kaya business
post operating profit of INR 41 mn.
EBITDA flat; margins decline
Marico earned EBITDA of INR 997 mn during the quarter. EBITDA margin dipped
256bps Y-o-Y. Lower A&P, staff costs, and other expenditure contributed 176bps,
27bps, and 77bps, respectively. These savings were offset by higher COGS,
which jumped 536bps in Q3FY11. The company’s primary focus is on growing its
brand franchise rather than increasing margins.
Outlook and valuations: Fairly valued over near term; maintain ‘BUY’
The company is eyeing growth through low unit packs (LUPs), rural markets,
focus on non-coconut hair oil and new product initiatives in the food segment
under Saffola. Kaya’s domestic business, which we believe is an overhang in the
near term, is a key concern. However, reversal in trend is visible. Also, the
previous price hike (~7% in December) taken by the company had minimum
impact in Q3FY11 due to low priced inventory pipeline; in Q4FY11, the company
will reap full benefit of the same. Also, Marico expects copra price to correct in
the near future. Hence, we maintain ‘BUY’ recommendation on the stock. On
relative return basis, the stock is rated ‘Sector Performer’.
Key takeaways from conference call
• Parachute and Saffola volumes sturdy: Parachute and Saffola volumes grew ~5%
and 13% Y-o-Y, respectively.
Saffola’s Y-o-Y volume growth dropped in Q3FY11 vis-à-vis Q2FY11 primarily on
account of reduced promotions with ~35% Y-o-Y reduction in promoted product
volumes.
The company’s international business continued to grow handsomely, up ~33% Y-o-
Y, driven by ~25% volume growth and ~8% price-led growth. However, due to 5%
INR appreciation, overall reported growth was 28%.
The company’s major focus in the medium term will be on growing volumes.
Management is confident of achieving 7-8% volume growth annually.
• EBITDA flat; margins decline: Marico posted EBITDA of INR 997 mn. EBITDA
margin dipped 256bps Y-o-Y. Lower A&P, staff costs, and other expenditure
contributed 176bps, 27bps, and 77bps, respectively. These savings were offset by
higher COGS, which jumped 536bps in Q3FY11. The company’s primary focus is on
growing its brand franchise rather than increasing margins.
• Copra prices: Copra prices during Q3FY11 were abnormally higher at ~62% over
Q3FY10. The company believes prices have peaked and could correct in the near
future, another testimony to this belief is that the company has considerably reduced
its copra inventory to less than one month (its normal inventory level for copra).
• Saffola raw materials: Prices for two of Saffola’s key inputs, safflower oil and rice
bran oil, declined ~3% Y-o-Y and increased ~25% Y-o-Y, respectively.
• Price hikes: Due to raw material inflation, Marico has taken a price hike of ~12% in
edible oil in Q3FY11; it could look at some more hikes if required. The company has
taken average price increase of ~ 24% till date in five months since August (5% in
August; 8% in October; 5% in November, and further 7% in December). However,
the last price hike (~7% in December) taken had minimum impact in Q3FY11 due to
low priced inventory pipeline; in Q4FY11, the company will reap full benefit of the
same. This is expected to compensate for a significant portion of raw material
inflation.
• Cooling oil: Cooling oil has been successful in Andhra, capturing 7-8% market share
in value terms. The company has expanded it to adjoining southern states—Tamil
Nadu and plans to launch it in Karnataka during the summer.
• Brand strategy in hair oils: For Marico a choice between Parachute and Nihar will
be based on brand strength in a particular geography. Parachute is stronger in South
and West India, while Nihar is stronger in Bihar and UP.
• Market share: The company’s hair oils franchise had a volume market share of
~22% during the 12 months ended November 2010. The share has grown from
~17% about four years ago. There has been a 140bps gain Y-o-Y.
• Rural focus: Rural sales grew ~28% Y-o-Y in Q3FY11, while urban sales have lagged
at ~17% Y-o-Y. The share of rural sales to total has grown to ~27% in Q3FY11.
• Provisioning for excise: The company continues to provide for 75% of duty
payable on coconut oil packs of up to 200 ml. Provision for Q3FY11 is INR 96 mn
(Q3FY10 INR 110 mn) and was INR 294 mn in FY10.
• Kaya: Kaya skin clinics posted revenue growth of 40% Y-o-Y to INR 620 mn in
Q3FY11, bolstered by same store clinic sales growth of ~11% Y-o-Y ( reversal in
trend with ~3% same clinic growth decline in previous quarter). Kaya (excluding
Derma Rx) incurred a loss of INR 9 mn at the PBT level (against INR 35 mn loss in
Q2FY11). In Q4FY11, while Kaya plans to add 1-3 clinics in the Middle East, it is
unlikely to open any new clinic in India. In Q3FY11, one clinic was opened in Middle
East. As per the company, acquisition of Derma Rx helped Kaya business post
operating profit of INR 41 mn. We expect revenue growth in the domestic business to
improve in Q4FY11 due to low base.
• Saffola rice and oats: The company is satisfied with current performance and
expects INR 400-450 mn of sales in FY12E. It expects food to account for 20-25% of
Saffola brand over the long term. Packaged rice is an INR 4 bn market and is growing
at 25% CAGR.
• International segment: The company’s international business continued to grow
handsomely in Q3FY11, registering ~33% top line growth over Q2FY10, driven by
~25% volume growth and ~8% price-led growth. MENA will contribute 35% to
internationals sales (i.e., INR 2,750-3,000 mn) in FY12E and the company expects
Malaysia to contribute ~INR 200 mn in FY12E. International businesses in
Bangladesh, Egypt, Middle East, and Derma Rx business yield higher margins
primarily on account of tax benefits and completely integrated manufacturing.
• Sales from Africa: Marico expects INR 800 mn sales in FY11E and INR 1,000 mn
plus in FY12E. Growth rates have been ~30% Y-o-Y.
• Tax rate: Likely to be 16% in FY11E and 18-20% in FY12E. Tax rates will jump in
FY12 as some areas will move out of tax shelters.
Company Description
Marico has evolved into one of the leading Indian FMCG companies from a coconut oil
manufacturer over the past few years. It has positioned itself on the beauty and wellness
platform and caters to hair care, health care, and skin care. Its brands include
Parachute, Nihar, Hair & Care, and Fiancee in hair care, Saffola, Sweekar and Ingwe in
health care and Kaya in skin care. The company has been at the forefront of launching
innovative products and services such as Saffola Cholestrol Control Atta Mix and Kaya
Skin clinics to provide Indian consumers with premium personal care products. Over the
past two years, Marico has captured inorganic growth opportunities to spread its base
across geographies and increase the range of products at its disposal. It has acquired
two hair care brands in Egypt, Fiancee and Haircode, which give it control of 50% of the
hair care market in the country. Further, it has acquired three soap brands in Bangladesh
and skin care brand Derma Rx in Singapore to expand its presence there.
Investment Theme
Marico is amongst the leading beneficiaries of the changing preference of health
conscious Indian consumer for better personal care products and services. The company
has been able to distinguish itself by offering niche products and services through brands
such as Saffola, and Kaya, while extending Parachute to various new generation hair
care products such as hair creams and value-added hair oils. Kaya has gained an
impressive premium positioning by offering an impressive bouquet of skin care services
along with extensive care.
Key Risks
Coconut oil forms the biggest share of Marico’s top line and bottom line. Copra prices
have been hardening over the past few months. A greater-than-expected inflation can
hurt the bottom line substantially.
Following the acquisition of highly profitable brands in Egypt and soap brands in
Bangladesh, Marico expects ~20% of its revenue and substantial share of profits to come
from these countries. Appreciation of rupee against Egyptian pound or Bangladeshi taka
puts the growth in revenues and profits at risk.
Marico had been earning excise benefit due to classification of coconut oil under excise
free items. Recent change in this classification by Central Board of Excise and Customs
(CBEC), currently challenged by the company in Court, could impact the company’s
profits negatively.
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