Marico: Strong margins

Having taken price cuts for products, it was primarily volume that drove the top line in the home market.

Marico surprised the Street with a strong bottom line for the September 2009 quarter. At Rs 62.4 crore, the net profit showed a rise of 32.4 per cent year-on-year, although the growth in the top line of 14.4 per cent, to Rs 690 crore, was in line with expectations. What made the difference was the 770 basis points jump in the gross margin, to just under 53 per cent, which was possible because copra prices were down 25 per cent year-on-year. As a result, the operating profit margin rose 330 basis points to 15.5 per cent.

With the company having taken price cuts for products such as Saffola in the edible oil category, it was primarily volumes that drove the top line in the home market. Key portfolios, such as hair oil, clocked a robust volume increase of 17 per cent. Nevertheless, the domestic consumer business grew just 5 per cent, while international sales were up nearly 50 per cent, helped partly by currency movements.

Revenues from Kaya clinics, of which there are now 99, were up 24 per cent mainly thanks to new clinics, as same-store-sales-remained muted. With consumer spends expected to remain strong, most brands in Marico’s portfolio, including Parachute, should continue to clock good volumes and, therefore, the company should have little trouble posting double-digit volume growth in the coming quarters. However, there is some element of down-trading which could prevent Marico from increasing prices for some brands. As such, the growth in revenues for the next couple of years may be restricted to 15-16 per cent with the company crossing the Rs 3,000 crore mark in 2010-11.

Operating margins are expected to stabilise at close to 14 per cent, which means the increase in earnings in 2010-11, should be just over 20 per cent. Marico has clocked 16 quarters of double-digit growth and the management has also shown great initiative in growing the business through the inorganic route. However, the current price of Rs 108, which discounts the stock by about 20 times estimated 2010-11 earnings, captures near-term upsides.