Over the years, Marico Industries has transformed itself from a coconut oil manufacturer, sold under its renowned “Parachute” brand, into one with presence across hair care, skin care and healthcare segments and nearly 20 brands under its fold. Likewise, its foray into international markets in the recent years has seen the share of global revenues rise to a fifth of total. Consequently, the company has been able to sustain growth rates of about 20 per cent in sales and profit in the last five years, and establish a de-risked business model. Investment in new product development has meant that these now account for a fourth of consolidated revenues, as compared to 3 per cent in FY2000. Despite the slack economic conditions and global slowdown, Marico’s earnings are expected to grow at 18-20 per cent in the next two years, on new product launches, volume growth in existing businesses, higher rural penetration and easing input cost pressures. Notably, valuations are reasonable, with the stock trading near the lower band (14-22x) of its one-year forward earnings.
| HEALTHY GROWTH | |||
| in Rs crore | FY08 | FY09E | FY10E |
| Net sales | 1,907 | 2,380 | 2,745 |
| OPM (%) | 13 | 13 | 13 |
| Net profit * | 159 | 184 | 227 |
| EPS (Rs) | 2.6 | 3.02 | 3.75 |
| PE (x) | 22.31 | 19.21 | 15.47 |
| * Adjusted for extra-ordinary items Consolidated financials E: Estimates | |||
On solid footing
In its flagship business (coconut oil), Marico has successfully extended its Parachute brand to related hair care segments like value-added hair oils, creams and gels, by identifying new categories and launching new products. Among launches (including products in test marketing phase) in the last 15 months are “Parachute Advansed Hot Oil” (suitable for winter season; launched in Q3 FY09), “Parachute Night Repair Cream” (a fragrant, protein-based hair cream being test marketed in Mumbai) and “Parachute Advansed Starz” (oil, shampoo and cream products for kids; launched in December 2007). These initiatives have helped Marico strengthen its product range, which along with healthy growth in existing products has helped sustain volume growth (average) of 10-11 per cent in last seven quarters (9 per cent in Q3, FY09).
The value-added hair oils business is also growing at a robust rate and includes products like “Parachute Jasmine” and “Nihar” (perfume-based oils), “Hair & Care” (protein based oil) and “Silk n Shine” (post-wash hair conditioner) among others. Along with new product launches, coupled with low penetration levels, average volumes growth was 20 per cent in the last six quarters (15 per cent in Q3).
The second biggest revenue contributor is the refined edible oil business (Sweekar and Saffola), wherein its Saffola brand is positioned on the ‘preventive’ platform. Capitalising on its health-related equity, the company launched atta products viz. Saffola Cholesterol Management (in 2007) followed by Saffola Diabetics, targeting the health conscious customers. More recently, in January 2009, it has launched “Saffola Zest” a salty baked snack (positioned as one that contains 50 per cent less fat) and Saffola Rice (for weight management). The volume growth for Saffola oil, which has ranged 20-30 per cent in the past, slipped to single-digits in the last two quarters as the price gap between Saffola and other refined oils (palm, etc) widened. With the price of Kardi (a key input for Saffola) seen declining, the price gap should narrow and volumes likely to pick up.
Likewise, Marico provides skin-care products and services under its Kaya business. It has 84 clinics (six added in Q3), of which 73 are located in 20 Indian cities and balance abroad. With a plan to add 15 clinics each year, this business (6 per cent of revenues) should grow at a robust pace (59 per cent growth in Q3). In June 2007, Marico started offering weight-management solutions under the Kaya Life brand, thereby extending its services portfolio. In initial stages, the business should see a full-fledged rollout soon.
Interestingly, the company enjoys a strong position in most of its businesses (Parachute 48 per cent volume share, Hair Oils 20-22 per cent, Saffola 98 per cent, Mediker 90 per cent); some of them provide niche solutions and have helped Marico distinguish itself from others. While many of these products are a result of investment in R&D, an extensive distribution reach (over 2.5 million outlets) helps in quickly rolling out new consumer products. With these segments under-penetrated, there is immense potential for Marico to sustain growth rates.
Expanding footprint
The company has been equally aggressive in its international business (includes two acquisitions since 2006). Notably, its brands enjoy a strong position in their respective countries, and revenues in most markets have grown at a rapid pace (average 46 per cent in last three quarters).
In Bangladesh, Marico is looking at sustaining its 72 per cent market share in coconut hair oils by encouraging customers towards using branded products. It recently launched its “HairCode” hair dye, which along with backward integration (crushing of copra for coconut oil) should help sustain growth rates and improve profitability.
While “Parachute” branded products (mainly creams) are doing well in West Asia, Marico’s sales in Egypt (Fiancee and HairCode brands command 62 per cent market share) were impacted in Q3 due to restructuring of the supply chain and higher inflation. With the revamp over and inflation slipping, the trend is seen reversing from Q4. A new factory for hair creams has also been commissioned (exempt from income tax till 2018), which will help service nearby regions and lead to improved profitability.
Investment rationale
A diversified product portfolio, ability to innovate, identify and tap niche/high growth segments, strong brands and the customer’s increasing attention towards health and personal care, should help Marico grow at a healthy pace.
In the near-term, while margin pressure should ease as input prices are coming down, revenue growth in FY10 may remain subdued (volume growth should remain healthy) due to the base effect (price hikes taken across categories; like 15 per cent in Parachute in the past). Overall, expect earnings to grow at 18-20 per cent annually over the next two years. At Rs 58, the stock trades at 15.5 times its estimated FY10 earnings and, can deliver 20 per cent returns over one year.
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