The Hindu Business Line : Marico: Buy

Growth is likely to come from newer categories. Marico now sees itself operating in the "beauty and wellness" segment rather than in hair and edible oils.

Robust volume growth
Margins to level off
New categories to drive growth
More acquisitions likely

MS ADITI GOVITRIKAR, model, poses with products of Kaya Skin Clinic. — Parth Sanyal

Marico, a leading producer of hair oils and edible oils and best known for its Parachute brand of coconut hair oil, turned in an impressive first quarter performance. Revenues increased by 38 per cent, while profits soared 46 per cent thanks to robust volume growth and low raw material prices. A promising product pipeline, benign raw material prices and considerable pricing power favour strong revenue and earnings growth over the next couple of quarters. Pursuit of new avenues for growth, both organically and through acquisitions, could catapult it onto a higher trajectory.

The Marico stock trades at 26 times its trailing four-quarter per share earnings and is at a significant discount to peers such as Dabur India. An investment can be considered with a one/two-year perspective.

Robust volume growth

Marico's revenues rose for the 23rd consecutive quarter, powered by volume growth in its "focus" brands. In recent years, the company has focused on driving high-margin or high-growth products, which include brands such as Parachute, Saffola, and Hair and Care.

While the hair-care category is growing at a healthy pace, Marico has been able to drive demand for premium brands such as Hair and Care and Parachute Jasmine, whose volumes rose 23 per cent. The flagship brand, Parachute, which enjoys a 50 per cent market share, registered a 12 per cent growth in volumes. Marico achieved this by introducing smaller packs at lower price points and through one-time price offs, rather than price cuts. Growth has been strong in the edible oils segment as well, with Saffola, its flagship brand in this segment, growing 14 per cent during the quarter.

Onto new categories

Growth is also likely to come from newer categories. While Marico has been successful in marketing the traditional benefits of coconut oil to the younger generation, it has moved on to value-added products such as hair creams and conditioners, offering greater range in the hair-care segment. These new launches have met with success. For instance, the Parachute After Shower Hair Cream for men now has a 40 per cent market share.

Marico sees itself operating in the "beauty and wellness" segment. It entered the skin-care business two years ago with the launch of its Kaya Skin Clinics.

There are 40 such clinics now and Kaya is expected to break even by the year-end.

Entry into segments such as toilet soaps, baby-care and non-oil functional foods reflect Marico's willingness to experiment. It is also active on the acquisition front, which could speed up its entry into these new segments.

Marico's success rate with new product launches in the past lends confidence. Sparsh baby oil, an extension of the Parachute brand, was launched nationally in May.

Last year, the company embarked on a flurry of acquisition of small regional soap brands in India and Bangladesh.

Marico has extended the marketing to Tamil Nadu of Manjal, an Ayurvedic brand with a strong presence in Kerala. Marico intends adopting a regional focus for its toilet brands for now, differentiating its brands from the national ones by focusing on unique functional benefits.

Prototypes that are being tested in the market include Parachute Jasmine soap, made of coconut milk; Parachute Therapie, a hair-fall-prevention solution; and Parachute Atta Mix, for those with cholesterol.

Margins to level off

With several new products in the pipeline, Marico will have to direct a substantial part of its resources towards advertising. In the first quarter, gross margins expanded by 650 basis points on the back of declining copra prices, a key input. This gave Marico sufficient room to hike advertising spends by 260 basis points to about 12 per cent of sales. Over the next couple of quarters, while copra prices are likely to remain soft, prices of crude vegetable oils — the input for the edible oils business — are likely to rise.

Marico may be able to use its pricing power in the hair oils business to mitigate cost pressure in edible oils. Operating margins are, however, unlikely to rise further.

With the phasing out of tax incentives, higher tax outgo could gradually slow profit growth over the next three-four years.

But this should not be a cause for concern in the near term. There is the possibility of an equity expansion in the near term; the company plans to raise Rs 500 crore to fund acquisitions and optimise its debt levels. Overpaying for acquisitions in its quest for growth is a key risk.

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