Sweekar boost for Marico

Sale will enhance overall profit margins of the company and free cash for use in more profitable businesses.

The positive reaction by Dalal Street to Marico’s sale of its edible oil brand Sweekar was short-lived. After the announcement of deal on Friday evening, the stock jumped three per cent on Monday, but gave up most of these gains on Tuesday. While the sale of Sweekar is in-line with Marico’s strategy of rationalising its low-margin businesses and will free up cash for deployment in other businesses, concerns over firm input prices and consequent margin pressure in its core businesses haven’t faded. Analysts believe this may have some impact on volume growth and margins in the near term, and may keep the stock, now at Rs 130.75, under check. However, given the company’s strategy of enhancing its value-added businesses and focus on profitable growth, it should prove fruitful in the longer run. Hence, investors may consider the stock on dips.

Sweekar sale, a positive move
After four years of scouting for a suitable buyer for its refined sunflower oil brand, Sweekar, Marico finally found a match in Cargill India. While the deal consideration was not revealed, analysts have estimated it based on valuations of Rath edible oil, which was also purchased by Cargill in November 2010 (0.3 times its sales of Rs 120 crore). Since, Sweekar has more variants and brand recall than Rath, analysts believe it could have clocked in premium valuations of Rs 70-80 crore (0.4 times sales).
 

IN GOOD HEALTH
In Rs crore	FY10	FY11E	FY12E
Sales	2,696	3,119	3,642
% chg y-o-y	13.4	15.7	16.8
Ebitda %	14.2	13.1	13.5
Chg in bps	177	-106	40
Net profit	243	287	345
% chg y-o-y	30.6	18.2	20.2
PE (x)	33.3	28.4	23.6
E: Estimated                                                               Source: Bloomberg

Sweekar’s sale would rub off positively on overall margins of Marico. Though it contributed six per cent (Rs 180 crore) to Marico’s consolidated sales, Sweekar was margin dilutive with low pricing power. Its operating margins were a meagre three-four per cent as against Marico’s overall margins of 12-13 per cent.

Apart from the cash inflow and margins, this deal would release working capital and manpower, which Marico can deploy towards other more profitable businesses or reduce its gross consolidated debt of Rs 434 crore (net debt at Rs 116 crore).

Core businesses
Notably, Saffola, Marico’s key edible oil brand, has been posting healthy growth and profits—volume growth of 12-18 per cent in the last four quarters. In addition to the low price variants of Saffola, Marico has also capitalised on the strong franchise of Saffola by foraying in the food space with value-added products such as Saffola Arise, Saffola Oats, etc and is likely to add more products in this space. Analysts expect Saffola’s sales volume to grow 13-15 per cent, while that of value-added products (including other brands like Parachute) to remain robust.

The flip side is that a surge in prices of key inputs (copra, sunflower and kardi oil) in recent months has contracted operating profit margins of Marico, despite price rise. For the December quarter, while its consolidated margins were down 300 basis points to 13 per cent, standalone (which has large contribution from Parachute and Saffola) margins fell sharply by 500 basis points to 11.2 per cent.

While the company has further raised prices of Parachute products by upto nine per cent in January and Saffola products between three and seven per cent, thereby protecting its margins, analysts are concerned about the effect of this on volume growth (if any), which they believe will be visible in the results of the March quarter. However, they believe input prices could soften in the coming months. For instance, while Copra prices have corrected by five per cent in March, seasonally, they decline during February to May. Also, since palm oil prices have softened (down 20 per cent since February), it could lead to further easing of copra prices, analysts say.

Meanwhile, Marico’s two plants in Egypt, which act as a supply hub for West Asia and North Africa region, were shut in January and for a few weeks of February due to the unrest. Egypt contributes three-four per cent of Marico’s consolidated sales and though, operations are limping back to normalcy, the current quarter performance will be impacted. In a note in early March, analysts at Prabhudas Lilladher estimated the total loss of business on account of turbulence in Egypt at close to Rs 20-22.5 crore. This would, however, get offset by the one-time gain on the sale of Sweekar in the March quarter. In the medium term though, they expect Marico’s international sales to grow at 20-25 per cent.

The road ahead
Marico’s acquisition of Vietnam-based ICP, a haircare and cosmetics company in February, is in-line with its strategy to build regional brands. The company plans to focus on three verticals — haircare, skincare and healthcare and expects skincare to contribute eight per cent to consolidated sales, healthcare 22 per cent and personal care the remaining 70 per cent. The improving profitability of its Kaya skincare business should further support Marico’s bottomline growth.