Marico Industries: Buy

FMCG stocks appear to be a good defensive proposition for investors under current market conditions, given the companies' strong cash coffers, low debt in the balance sheet and the relatively low sensitivity of consumer spends (on FMCGs) to interest rate increases. Marico Industries offers a strong growth play on the sector, with its focus on the lucrative beauty and wellness segments of the FMCG market. Improving product mix and the prospect of a ramp-up in earnings from new and recently acquired brands suggest that the company could manage a 25-30 per cent growth in earnings over the next couple of years. Investors can consider adding the stock to their portfolio, particularly during any decline in price over the next few days linked to the broad markets. At Rs61, the stock trades at about 24 times expected FY08 earnings, a valuation that is in line with peers.

Though Marico Industries has traditionally derived the bulk of its revenues from hair oils (Parachute) and edible oils (Saffola and Sweekar), it has transformed its product portfolio in recent years through a slew of product launches and new category forays. The company's portfolio now encompasses premium products in segments such as hair care (Parachute Advansed, After-Shower cream and hair gels), baby care (Sparsh) and soaps (Manjal), apart from skin care services and salons (Kaya Skin Clinics and Sundari LLC). On another front, a string of overseas acquisitions has helped the company acquire a pan-India footprint, with significant market shares in hair care and soap markets in West Asia, Bangladesh and Egypt. An improving product mix has led to operating margins expanding significantly from the single digits in FY05 to 16 per cent levels in FY07.

A focus on premium products and niche categories in the FMCG space, where competitive intensity is relatively low, also contributes to superior pricing power for Marico. Having held the price line on its key products over the past couple of years, the company enjoys the leeway to take some price hikes to offset input cost increases over the next year. With a turnaround in the Kaya Skin Clinic business and benefits from recent acquisitions expected to flow in by the next financial year, there appears to be scope for significant scaling up of earnings from current levels. Integration issues and overseas exposures associated with Marico's inorganic growth strategy are the key risks to earnings growth.