A diversified portfolio, healthy volumes and rapidly growing international sales augur well for Marico’s future.
The rush by Indian FMCG players to acquire companies abroad is getting stronger. While reports of Godrej Consumer closing on a deal to acquire an Indonesian household products company as well as Sara Lee Corp’s home insecticides business are doing rounds, Marico has announced the acquisition of Malaysia’s third largest hair-care player Code 10, a Colgate-Palmolive owned brand.
The size of the deal has not been disclosed, but it is estimated to be around Rs 18-24 crore assuming a multiple of 1.5 to 2 of the turnover. Although this is a small-ticket acquisition for Marico, there is an expectation of a few more. The management indicates that Marico is on the look-out to acquire companies from the emerging markets.
| WELL NOURISHED | |||
| in Rs crore | FY09 | FY10E | FY11E |
| Sales | 2388.0 | 2751.0 | 3199.0 |
| EBITDA (%) | 12.7 | 13.4 | 13.4 |
| Net profit | 189.0 | 239.0 | 285.0 |
| EPS (Rs) | 3.1 | 3.9 | 4.7 |
| P/E (x) | 32.6 | 25.8 | 21.6 |
| E: Analysts’ estimates | |||
While inorganic growth has helped the international business grow at a fair clip, the domestic markets are also growing at a fair steam. Put together, with workhorse brands like Parachute and Saffola, ability to innovate new products and an eye to expanding into new markets, Marico should be able to consolidate its market position with robust volumes.
Parachute: Flying high
With popular brands like Parachute, Marico occupies around half of the domestic branded coconut hair oil market estimated to be around Rs 1,500-2,000 crore. In the coconut hair oil market, the company took advantage of up trading observed in the last five years. The branded coconut hair oil grew at an average of 10-15 per cent in the last five years, whereas unbranded or loose grew at around 5-10 per cent in the same period. Along with its Nihar and Oil of Malabar brands, the company enjoys a 55-56 per cent share of the hair oil market.
What’s more important is that Marico has consistently introduced new products like perfume-based oil, cooling oil and hot oil besides, Parachute Therapie among others, which have helped it create new categories and expand its business. Likewise, it has successfully forayed into other hair care segments like creams, kids’ shampoo and so on. In addition, providing value proposition to the customer through introduction of products at different price points such as Re1 and Rs 5 have also helped, especially towards increasing penetration in the rural markets.
Saffola: Healthy growth
The high inflation in key raw materials in 2008-09 along with the economic downturn had impacted volume growth of its Saffola cooking oil as customers down-traded. However, a decline in Safflower prices in 2009-10 has benefitted the company. On an average, volumes have risen by 17-18 per cent in the first half of 2009-10 as compared to 4 per cent increase in the second half of 2008-09. During September 2009 quarter alone, Saffola volumes grew by 22 per cent, though value growth was in single-digits (due to lower realisations). Overall, the cooking oil business is expected to clock 15-20 per cent volume growth for 2009-10.
Again, Marico has been quick to foray into new categories like functional foods under Saffola by tapping the brand’s health-based equity. Among these, the company now plans to reformulate and prototype Saffola Zest, a baked snack that is lower on fat than fried snacks and is made from high fibre grains. The response to prototyping of Saffola Rice has been positive and the company is planning a national launch in the current quarter. These businesses are still small contributors, and the company’s ability to draw good customer response will be under test going ahead.
Overseas sales: Growing fast
From a single digit share in few years back, Marico’s international business now occupies a fifth of the consolidated turnover. It has been able to absorb the acquisitions as well as improve its position in most key overseas markets.
The company is a major player in the hair-care segments in Bangladesh and Middle-East regions with products like Parachute coconut hair oil capturing major market shares. New product offerings are being explored to strengthen existing brands and improve its product portfolio.
The backward integration in operations in Bangladesh and the servicing of the middle-east and North Africa region through its manufacturing hub in Egypt have both commenced. This would contribute towards margin improvement in the international operations from about 10 per cent to an average margin of around 12 per cent in the next 2-3 years.
Its latest move to acquired Code 10 will also help to further expand presence in Malaysia and nearby markets in the long run. The company is also targeting new markets like Algeria, Morocco, and Sudan in Africa to expand its international presence. Overall, expect this business to grow at 25-30 per cent in the next two years and its share in consolidated revenues to rise to around 25 per cent.
Conclusion
A strong brand portfolio, fast growing international business operations and healthy product pipeline augurs well for Marico. Notably, its Kaya skin-care clinics business, now about 7 per cent of consolidated revenues, is also regaining ground after last years’ subdued show. As the company focuses on improving capacity utilisation of its existing clinics, an induction of new clinics as well as introduction of new products could see this business break-even in 2009-10, and start contributing to profits thereafter.
Overall, expect the company to deliver an average growth of 15-16 per cent in revenues over the next two years. Profit growth in expected to be around 22-24 per cent during this period. However, so far, Marico had been benefiting due to classification of coconut oil under excise free items. But, a recent change to excise duty classification, which has imposed excise duty on coconut oil in below 200 ml packs, has meant higher expenses. Such packs form around three-fifth of its total coconut oil sales or a quarter of its total sales. Nevertheless, Marico has already made provisions of Rs 17.2 crore in the first half of 2009-10 and is expected to provide a total of Rs 40 crore for the full-year, which should insulate if the court case verdict turns hostile.
At Rs 101.15, the stock is trading at 21.6 times its 2010-11 estimated earnings and can be considered on dips.
