Annual Report Analysis - Marico:: Edelweiss

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Marico’s FY14 annual report analysis indicates sluggish revenue growth of 8% in the Indian FMCG business (~75% of consolidated revenue) riding 6% volume surge. International market’s (~25% of revenue) revenue jumped 16% supported by favourable exchange rate, which contributed 10% to growth; volumes rose a paltry 5%. EBITDA margin expanded 190bps to 16% due to lower advertisement & sales promotion spending, which dipped to 12% (FY13: 13.4%) of revenue. RoCE and RoE jumped to 29.8% and 29.0%, respectively (FY13: RoCE: 24.1%, RoE: 23.9%), as Marico Consumer Care (MCC), Marico’s subsidiary, adjusted intangible assets of INR7.23bn recognised on acquisition of Paras Pharmaceuticals’ (Paras) personal care business, against share capital and securities premium. RoE, adjusted for write offs of intangibles and Kaya demerger, fell from 25.3% in FY13 to 22.9% in FY14. Marico Middle East FZE’s (FZE) losses spurt 67% to AED62.3mn (INR1bn; FY13: AED37.3m) as it recognised impairment losses of AED34.4mn (INR0.5bn) due to continued losses and decision to reduce scope of operations. Its net worth stood at ~AED(80)mn (negative INR1.3bn).The company’s cash conversion cycle fell to 77 days against 96 days in FY13 led by decline in inventory days to 121 (FY13: 141). Effective tax rate is expected to increase to 28-29% in FY15/FY16 against 23.1% (FY13: 22.7%) currently.

What’s on track?

Cash conversion cycle fell to 77 days against 96 days in FY13 led by dip in inventory days to 121 (FY13: 141).

Marico demerged its loss making skin care (Kaya) business w.e.f. April 2013, which led to improvement in profitability and return ratios during the year.

Profitability of key subsidiaries in Bangladesh and Vietnam catapulted 77% and 196%, respectively, despite challenging political environment and sluggish economic growth.

What needs tracking?

MCC, Marico’s subsidiary, adjusted entire intangible assets of INR7.23bn recorded on acquisition of Paras’ personal care business against securities premium (INR 0.54bn) and reserves & surplus (INR6.7bn). This led to expansion of Marico Group’s RoCE and RoE to 29.8% and 29.0%, respectively (FY13-oCE: 24.1%, RoE: 23.9%). However, RoE, adjusted for write offs of intangibles and Kaya demerger, declined from 25.3% in FY13 to 22.9% in FY14.

India revenue (FMCG) grew a mere 8% due to sluggish 6% volume growth. Management expects volume to surge 7-8% in the near future and overall revenue growth of above 15%.

Favourable currency movement contributed bulk (10%) of the international revenue (FMCG) growth of 16%. Volume growth remained sluggish at 5%.

Marico Middle East FZE’s (FZE) losses spurted 67% to AED62.3mn (INR1bn) (FY13: AED37.3mn) as it recognised impairment losses of AED34.4mn (INR0.5bn) in respect of 2 of its subsidiaries due to their continued losses and decision to reduce scope of operations. Net worth stood at ~AED(80)mn (INR1.3bn). Marico’s investment in FZE stood at INR280mn.

Going forward, effective tax rate (ETR) is expected to increase to 28-29% as tax exemptions on certain manufacturing units will lapse. Current ETR (excluding tax on dividend from overseas subsidiary) stood at 23.1% (FY13: 22.7%). However, Marico is expected to continue to pay tax under MAT and thus higher ETR will not have much impact on cash outflows. MAT credit, as at March 2014, stood at INR1.5bn and management expects to utilise it over the next 3-4 years.

LINK

https://www.edelweiss.in/research/Annual-Report-Analysis--Marico/27599.html