Wealth in wellness

Marico's focus on the health and beauty categories and international business should help it grow at a fast clip.

During turbulent and volatile times, investors generally flock to defensive sectors like fast moving consumer goods (FMCG). Additionally, the sector has also emerged as one of the major beneficiaries of India's changing demographic pattern and increasing purchasing power leading to higher demand for hair care, beauty care and wellness products. Thus, companies, like Marico, catering to these segments are likely to show a higher growth.

Strong domestic brands

Marico has developed very strong brands over the years and has attained leadership position in its respective segments. For example its flagship brand, Parachute, which contributes about 40 per cent of its revenues, dominates the coconut oil market, with a share of 48 per cent.

Similarly Saffola, another flagship brand contributing more than 20 per cent of sales, has 98 per cent market share in premium edible oil category. Its other products like Revive (fabric starch) and Medikar (anti-lice treatment) are the leaders in their respective segments with a market share of more than 90 per cent.

After building strong brands, the company is moving onto the next ladder by leveraging its strong brands and introducing product extensions in its respective categories. For instance, the company has leveraged on its Parachute brand and introduced variants like Parachute Advanced, Parachute Jasmine and Parachute Hair Fall Therapy in the value-added hair oil category and Parachute After Shower Hair Cream for men. Similarly, it has extended its Saffola brand to introduce Saffola Atta mix for controlling cholesterol and diabetes. Thus, incremental revenues will come from these variants even as its old brands report matured growth.

The growth drivers

Kaya Skin Clinics: Since the launch of 'Kaya Skin Clinics' in FY04 with 13 outlets, Marico has successfully ramped up its network. The company, today has about 50 outlets spread across India (six added recently) and seven in overseas market (mainly Middle East). The company targets the high-end skin care market and the high-income upwardly mobile urban consumers in the tier I & II cities.

The company faces least competition in this business due to its focus on niche customers and specialised services unlike its peers like HUL's Lakme Beauty Saloon, which caters to mass market. Marico plans to add 15 outlets each year for the next few years. Business from Kaya is expected to grow at more than 20 per cent, from about Rs 78 crore now, in the next few years.

International business: Marico's international business, which contributed 12 per cent to its total revenues, is spread across three major growing markets like Bangladesh, Middle-East and Egypt. The company offers products like coconut oil, perfumed oils, hair creams and edible oils and, has established strong presence in these markets. For example, Parachute coconut oil has 60 per cent and 95 per cent market share in Bangladesh (company's oldest market) and Middle East.

The company has been aggressive in expanding in the international market through inorganic route. It has acquired seven companies (two in India) since 2006, five of which are in the international markets namely Bangladesh, Egypt and the recent one in South Africa (Enaleni Pharmaceuticals consumer division).

Says Vinod Kamath, chief of finance and IT, "Inorganic expansion is a part of our growth strategy and we are open to even leveraged acquisitions if the products boost our growth." The inorganic route helps in two ways. Firstly, it provides a ready market and brands and secondly, the distribution network provides a platform to launch Marico's own products in those markets. The share of the international business is expected to reach 16 per cent by FY10, as revenue growth is expected to be higher at over 20 per cent.

Financials

The company's net sales, operating profit and net profit are expected to grow at 18 per cent, 21 per cent and 30 per cent CAGR respectively between FY07 and FY10. These growth rates are the highest among its peers. For example, its closest peer, Dabur's sales and net profit are expected to grow at 17 per cent and 20 per cent respectively in FY07-10E and Godrej is expected to clock a growth of 16 per cent and 12 per cent respectively.
 

HEALTHY FUTURE
Rs crore	FY07	FY08E	FY09E	FY10E	CAGR
Revenues	1556.90	1926.00	2280.50	2560.00	18.03
Operating profit	212.80	269.80	328.35	380.00	21.30
Net profit	112.90	171.70	215.05	250.00	30.34
EPS	1.85	2.82	3.53	4.11	30.34
OPM (%)	13.67	14.01	14.40	14.84	-
NPM (%)	7.25	8.91	9.43	9.77	-
Source: Analysts' reports

Increasing share of the international operations as well as high growth businesses (edible oil and skin care) in the domestic market are expected to drive top line growth. Further, focus on modern trade and strategy of occupying more shelf space will aid volume growth.

Margins are likely to improve due to better product mix and capability to pass on cost escalation due to strong brand loyalty. Going ahead, profitability from Kaya clinics will also add to profit growth as typically, each clinic has a break even period of 9-12 months and most of its existing clinics are making profits.

In the medium term, margin improvement will also happen because of softening of raw material prices like copra and kardi after reaching their peak levels. Says Kamath, " Our endeavor is to achieve a sustainable profitable growth and maintain margins." Thus, we focus on maintaining margins on an annual basis rather than short-term or quarterly movement on either side, he adds.

Investment rationale

At Rs 65, the stock trades at 18.4 times and 15.8 times its FY09 and FY10 estimated earnings. This looks reasonable when compared with its peers' valuation (Godrej Consumer at 19.5 and Dabur India at 28.25 times FY09 earnings) and growth rates for the next few years.

The company's ability to successfully launch products catering to specific customer needs also adds to its strengths. Notably, Marico is one of the best plays on changing lifestyle pattern and increasing awareness on health and beauty.