Marico Industries

Inflation, rising interest rates and a slowing economy — if any set of companies is well-placed to weather this turbulent environment — it is a select set of FMCG makers. The FMCG business is not capital-intensive and generates high levels of cash; FMCG spends also make up a small, “core” portion of the consumer’s portfolio that is not immediately vulnerable to a cyclical economic slowdown.

Marico Industries, with a strong clutch of brands in personal products, hair care and edible oils, appears a good investment in this backdrop. Amidst spiralling input prices, strong brand equity in its traditional hair oil business has allowed the company to take periodic price increases without impacting volume growth or market share.

The company is also firmly ensconced in high potential FMCGs such as hair care, branded foods and male grooming, targeted at the affluent urban consumer. A healthy pipeline of new products and a successful retail services foray (Kaya Skin Care & Kaya Life) also have the potential to add significantly to earnings over the medium term.

The stock, trading at Rs 53 (16 times estimated FY-09 earnings), is at a valuation discount to the FMCG space (20 times forward earnings), not having participated in the recent up-move in the sector. The stock offers potential for a 15-20 per cent return, with relatively low downside risk.

Improving product mix

From relying mainly on coconut oil and edible oils for revenues, Marico Industries has in recent years expanded its portfolio through brand extensions and forays into lucrative niches such as post-wash conditioners, male grooming, skin care services and functional foods.

The hair oil portfolio, where Marico continues to be the national market leader, has been extended well beyond Parachute coconut oil, into value-added offerings such as Shanthi Amla, Hair & Care, Parachute Advansed and Parachute Jasmine.

With a 13 per cent growth in 2007-08, hair oil has been among the fastest growing segments within FMCGs over the past year, driven by consumer uptrading from plain to value-added oils and from unbranded to branded offerings.

Marico’s entry into the niche post-wash care market with Parachute After-Shower cream for men (42 per cent market share) and Silk N Shine for women (32 per cent) has resulted in strong market shares for Marico in both these markets.

The company has a strong new product pipeline in hair care, with nascent forays into cooling oils (Maha Thanda), hair care (Night repair cream) and kids shampoos and oil (Parachute Starz).

In edible oils, Marico has gradually exited the price-sensitive sunflower segment (Sweekar) and has focused on its premium Saffola franchise, which is strongly positioned on the health platform. Marico’s offerings of blended oils have delivered a 22 per cent volume growth in 2007-08 amidst rising edible oil prices, heavy competition and consumer down-trading to low-priced brands. Marico’s plans for Saffola include an expansion in blended edible oils and a foray into functional foods such as Saffola atta — targeted at diabetes and cholesterol management.

Changes in the product mix, with a higher proportion of premium products, have contributed to a sharp expansion in Marico’s operating profit margins from 9 to 14 per cent over the past five years.

A higher proportion of premium brands ensures that Marico retains strong pricing power to pass on input cost increases to consumers. Marico’s foray into the retail skin care services through Kaya Skin Clinics has showed good traction, growing 45 per cent over three years and attaining breakeven in 2007-08.
Inorganic route

Apart from nurturing a healthy pipeline of new products, Marico has also embraced inorganic growth through a string of domestic and overseas brand acquisitions. Domestic acquisitions have brought in strong regional brands such as Nihar and Oil of Malabar coconut oil and Manjal soap, which extend the company’s distribution reach. Marico’s overseas buys have focussed on building a brand and marketing presence in countries such as Bangladesh and the West Asian and African regions, which offer a large consumer market with good growth potential. This overseas presence entails some currency risks, but allows Marico to build brands in new geographies, with lower competitive pressures than in the Indian market.

Though some of these acquisitions (Sundari LLC, Enaleni Pharmaceuticals) are yet make a significant contribution to numbers, the international business has managed a sharp 50 per cent growth in 2007-08 (21 per cent organic).

The string of acquisitions, costing Rs 550 crore in all, has been funded by a QIP offer (Rs 151 crore) and pegged up debt on Marico’s balance-sheet. However, both the debt:equity and interest cover remain well within comfort zone.
Financials

The company closed 2007-08 with a 22 per cent growth in revenues (17 per cent organic) and a 27 per cent growth in sustainable net profits on a consolidated basis. Compounded sales and profit growth rates for the past five years, stand at 21 per cent and 30 per cent respectively.

via BL