The Hindu Business Line : Marico Industries: Buy

Skin care, hair care, salon services, grooming... Marico Industries has just the right businesses in its portfolio to capture the rising spend on lifestyle products by the Young Indian. With the company's growth rates already moving into a higher trajectory this year, the stock has actively participated in the re-rating of the FMCG universe.

It now trades at a valuation of 30 times its trailing 12-month earnings, not expensive when compared to other FMCG stocks, but demanding in terms of the required growth in earnings. This may make the stock suitable only to investors with a two/three-year perspective.

With the revival in consumer spending still at a nascent stage, investors can add the Marico stock to their portfolio with a return expectation of 12-15 per cent a year. Any meltdown in the stock price in line with the broad market may provide an even more attractive entry point.

Focus on margins

Coconut oil brand — Parachute — and edible oil brands — Saffola and Sweekar — have traditionally been the key revenue drivers for Marico. In recent years, the company honed its strategy to break away from the commodity influence on these businesses.

In the coconut and vegetable oils business, it has invested in brand-building and stayed away from frequent price re-jigs to keep up with the commodity cycle. As a result, the company's profit margins have remained stable, despite blips in the commodity cycle and the presence of strong regional competitors.

New growth engines

Over over the past two years, Marico has also been de-focussing on the vegetable oils businesses to build a high-margin portfolio with a wider geographical reach. The company has embarked on a four-prong strategy:

It has rolled out a slew of premium brands in conventional businesses to persuade consumers to upgrade. The value-added hair oil brands — Parachute Jasmine, Parachute Advansed, Shanti Badam Amla and Hair & Care — have managed to pep up value growth for the hair-care business.

The company has also forayed into categories such as hair conditioners (Silk n Shine), male grooming (Parachute after shower cream) and baby care (Sparsh baby oil), which can deliver substantial value growth with higher margins. Marico's hit rate with product launches has been quite good.

The company has been actively pursuing expansion opportunities for its brands in the overseas markets such as Bangladesh and West Asia, with considerable success.

Parachute is now the largest coconut oil brand in Bangladesh. Marico's overseas forays include Sundari LLC of UK, a global Ayurvedic company acquired a couple of years ago. Sundari's presence has been expanded into spas and leading hotel chains such as Four Seasons and Marriott, across the US and in the Asia-Pacific.

The international business contributes only about 12 per cent of Marico's current revenues; it has, however, been growing at a faster pace compared to the domestic business in the past year.

Inorganic growth opportunities, wherever and whenever they have arisen, have been snapped up. Marico has acquired a slew of smaller brands over the past two years, to acquire a footprint in regions where it sees growth potential.

Camellia and Aromatic, two soap brands in Bangladesh; Manjal, a strong regional brand in Kerala, and Nihar, Hindustan Lever's coconut oil brand are some of Marico's recent acquisitions. Nihar, a Rs 120-crore brand will add directly to Marico's market share in this segment. These brands also have a distribution reach that complements Marico's network. This will be used as a platform to enhance distribution for the older brands in the portfolio.

The Kaya business

Marico's foray into the salon business with Kaya Skin Clinics gives it a toehold in this promising business. After opening initially in the metros, the clinics are now being rolled out in new markets in India and abroad.

Kaya skin clinic, one of the new growth engines.

The Kaya business, with 40 clinics, reported Rs 33 crore in revenues in the first nine months of 2005-06. Break-even is expected in 2006-07. Clearly, each of Marico's new business forays has the potential to substantially ramp up its growth rate from the historical average of 13 per cent managed over the past five years.

Thanks to the resurgence in consumer spending, the company has managed a 12 per cent growth in sales and a 28 per cent jump in earnings in the consolidated financials for the first nine months of 2005-06.

There is an unsustainable element to the earnings growth, as prices of key inputs such as copra were ruling low during this period. In the wake of several promising business initiatives unveiled over the past couple of years, earnings growth could, however, continue to outpace revenue growth over the next few years.

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