MARICO - Maintaining Good Health • Good volume growth expected from domestic as well as international markets.
• Strong financial performance for H1FY12 despite margin pressures.
• Main raw material copra prices are softening.
The FMCG sector is considered to be one of the best defensive plays in the stock market. Rather, in times of uncertainty the FMCG sector is considered to be a safe place to park funds. Hence we are recommending Marico which is one of the leading Indian companies offering consumer products and services in the global beauty and wellness space. We are of the opinion that the scrip not only offers a cushion to the downside but also provides room for growth.
When we talk about FMCG players, increase in volume and price are the two factors that lead to growth for companies. Increasing volume is considered to be very good as the rising prices may result in losing customers which are hard to woo back again. Currently, most of the FMCG companies are facing rising input pricing pressures and are passing on this cost to some extent to their customers. However, Marico has managed to sail through these uncertain times thanks to good volume growth which helped it in deferring from passing on much of its costs to the customers.
The H1FY12 performance of the company clearly indicates this aspect where despite the margin pressures it has managed to post strong bottomline growth. This has also helped the company to maintain its leadership position in all the products except hair oil. Further, the company is also expected to gain on account of the increasing health cautiousness in the domestic markets. Marico offers products like Saffola brand oil and oats which have less elasticity in demand. Going ahead, the company is betting on this volume play. Therefore, considering the strong management bandwidth, expected growth on the volume front, improvement in the margins on account of the marginal increase in prices (1 per cent) along with the declining raw material prices, we recommend a ‘buy’ on the counter.
With a presence in the domestic as well as the international markets, Marico has a strong product portfolio. It has brands like Parachute, Saffola, Nihar, Medikar, Kaya, Derma Rx, etc which have a good market share in India and abroad. (See Table: Market Share). It has three key business segments. Its consumer products business in India (CPI) contributes around 68 per cent of the total revenue, while its international business group (IBG) contributes about 25 per cent. The remaining 7 per cent comes from Kaya skin Clinic.
As mentioned earlier, the company is focusing on volume growth from the rural markets. In Q2FY12 the rural markets contributed approximately 30 per cent (up from 27 per cent in FY11). With better monsoons and social welfare schemes, this rural demand has been the prime source of growth for the company. Though there are certain fears about the fading of growth in rural areas, the company’s spokesperson has clearly stated that there will be no impact in the near to medium term. As such, the management expects to achieve volume growth of 6 to 8 per cent in coconut oil, 15 to 17 per cent in hair oils and 15 per cent in Saffola.
In the international segment the company will focus on gaining more market share, introduce other products and expects to grow in healthy double digits. Its new product offerings like Saffola Masala Oats and Parachute Advance Body Lotion are also performing well. According to the spokesperson, another new product launch will happen after these two capture a healthy market share. Along with the expected volume growth it has recently gone ahead with a 1 per cent hike in price across all the categories. This factor along with the expected decline in the copra prices (reduction of 11 per cent since Q1FY12), which accounts for almost 40 per cent of the overall raw material prices, is expected to result in margin improvement.
| Market Shares For Key Brands |
| Brand And Territory | Market Share (%) | Rank |
| Coconut Oil - India | 53 | 1st |
| Saffola Oils - India - Premium ROCP | 55 | 1st |
| Hair Oils - India | 23 | 2nd |
| Kaya Skincare Solutions | 35+ | 1st |
| Parachute Coconut Oil - Bangladesh | 69 | 1st |
| Hair Code Hair Dye - Bangladesh | 29 | 1st |
| X -Men Men's Shampoo - Vietnam | 41 | 1st |
| Hair Code and Fiancee - Egypt | 57 | 1st |
Another factor is that despite not passing on the cost increase to the customers, its financial performance has been very good. On a consolidated basis in H1FY12 the company reported a growth of 29 per cent in net sales to Rs 2,023 crore. Its net profit witnessed a decent growth of 12 per cent to Rs 163 crore. The raw material expenses accounted for almost 44.60 per cent of the net sales which is 330 basis points higher when compared to a similar period last year. On a half yearly basis, Marico reported an EPS of Rs 2.66 per share. The stock is currently available at a trailing P/E multiple of 29.77x. Growing market share, good consumption demand and decreasing raw material prices will further improve the performance of Marico in the coming quarters.
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