Marico is expected to benefit from rising market share and higher margins (aided by lower copra or dried coconut kernel prices) in the medium term. Analysts expect it to clock 18 per cent top line growth over 2012-15, driven by new launches and acquired portfolio (Paras’ personal care range). Falling copra prices, coupled with higher contribution of value-added categories such as packaged foods and personal care products, will aid long-term margin expansion.
“We believe most of Marico’s portfolio is likely to see a margin improvement in the years to come, and factor in a two percentage point rise in Ebitda (earnings before interest, taxes, depreciation and amortisation) margins over the same period, leading to a 22 per cent growth in earnings,” says Ritwik Rai, analyst at Kotak Securities.
The Marico scrip has been re-rated over recent years, as it diversified from a single product, Parachute coconut oil. It leveraged the Parachute and Saffola brands by successfully launching new products, such as body lotion, wheat and oats. Most analysts are positive on the stock and expect it to rise up to 15 per cent over the next year. It trades at 26.7 times FY14 estimated earnings, significantly below its peak multiple of 30-35 times. The company, leader in the hair oil category (coconut oil and value-added hair oils), enjoys dominant positions across most of its other categories. Despite volume moderation, it has managed to increase market share, indicating strong prospects.
| STEADY GROWTH | ||
| In Rs crore | FY13E | FY14E |
| Net sales | 4,773 | 5,603 |
| Y-o-Y change (%) | 19.1 | 17.4 |
| Ebitda (%) | 14 | 15 |
| Y-o-Y change (bps) | 120 | 100 |
| Net profit | 410 | 497 |
| Y-o-Y change (%) | 29.2 | 21.3 |
| Price/Earnings (x) | 33.3 | 27.6 |
| E: Estimates Source: Analyst reports | ||
“Notwithstanding the moderation in volume growth, we believe the long-term prospects of Marico’s core categories remain attractive. Its market share gains in all its categories, despite the existing leadership position, underscore the strength of its brand franchise,” says Gautam Duggad, fast moving consumer goods analyst at Motilal Oswal Securities.
Further moderation in demand, higher competition and volatile raw material prices remain key risks for the company. Its Kaya (skin care) business is taking longer than anticipated to become profitable and any positive development here will act as a key catalyst for the stock.
“We think if Marico can demonstrate strong profit growth in the Kaya subsidiary or its personal care forays over the next two years, the stock could benefit,” says Aditya Mathur of Citigroup.
Market share gains continue
Despite moderating organic volume growth, the company has continued to gain market share by scaling up its distribution network. While lower copra prices will enable Marico to take prudent price cuts, higher advertising spending should support volume growth. Analysts expect Parachute, Saffola and the value-added hair oils segments to show volume growth of eight per cent, 12 per cent and 17 per cent, respectively, in the near term. However, its cooling and almond hair oil businesses continue to be under pressure.
The canteen stores department segment has been under pressure in recent quarters. This segment forms up to seven per cent of revenue and slower demand has resulted in low single-digit volume growth for the Saffola brand. The management expects the foods segment to be under pressure over the next two to three quarters as well, as a large part of the products here are discretionary in nature. The management expects the share in Saffola of atta (wheat flour), wheat and oats to expand from the present eight to 10 per cent to about 25 per cent in the next two years.
Marico plans to increase ad spends on its Paras brands (Livon, Zatak deodorants and Set wet hair gel), expected to grow 30 per cent over the next five years. Analysts believe the Paras portfolio will drive not just market share but margin gains as well.
