On A ‘Hearty’ Note - Marico

There are very few companies that not only perform better in good times but also perform with equal ease during the bad phases. Investors prefer such companies as they are safe bets and give them decent returns in the long term. Marico is one such company and hence has been chosen to be a part of our Choice Scrip column. With a presence in the hair care, healthy edible oil business and skin care solutions, Marico has been a silent performer for the past nine years. What impresses us is its consistency of posting sales growth over the last 33 consecutive quarters since Q2FY01. In fact, on the bottomline front the growth has been over 37 consecutive quarters since Q2FY00.

This strong performance acquires more significance as Marico has come out unscathed through the slowdown in economy faced during 2000-03. So the current volatile economic scenario isn’t new to Marico and hence we believe that it is well-equipped to ride this phase. But this is not to say that Marico is not feeling the heat at all. Its volume growth has slowed down. Parachute and Nihar, two of its products, recorded volume growth of nine per cent each, while its frontline product Saffola’s volumes declined 3 per cent in Q3FY09. In the wake of these Q4FY09 results, the scenario might not look so exciting, but that has been factored into the stock price. Despite this we believe there could be an upside of at least 20-25 per cent in the coming one year in its share price.

As a strategic shift, Marico is moving towards premium and aspirational brands. This is seen from the positioning of Saffola as ‘good for the heart’. Even the Kaya Skin Clinic is aimed at modern day consumers’ beauty and wellness needs. It is also moving from mere hair products to advanced hair creams and hair gels. All these steps enable Marico to command a higher premium from customers and higher PE from investors. Raw material cost makes for 40 per cent of its Q3FY09 sales with copra and safflower being major inputs. If the cost of these inputs declines then it could lead to substantial margin expansion. Copra prices increased 30 per cent till Q3FY09 but now seem to have peaked and are expected to decline during Q4FY09. Besides, Saffola prices, which remained firm due to high safflower prices, are expected to soften to a reasonable premium. It is expected that safflower prices could fall once its season starts from March 2009. This will lead to an improvement in margins and drive volumes as well, while a further push could come from price hikes done till 9MFY09. Further, Marico’s international operations continue to be robust with 44 per cent growth. International operations contribute 20 per cent to Marico’s progress and its inorganic growth in South Africa is reaping benefits as this sector now constitutes 10 per cent of its international business. Marico has continued to have a stronghold in Bangladesh with its Parachute brand that commands a 72 per cent market share. Its Parachute cream has a 24 per cent share in the Middle East region. Marico’s Kaya Skin Clinic has also done well with a brisk growth rate at 59 per cent in Q3FY09.

On an annualised basis Marico’s topline and bottomline could be Rs 1,988 crore and Rs 180.70 crore respectively for FY09. At these estimates Marico generates an EPS of Rs 2.95, thereby resulting in PE of 20x, which we believe is attractive. Hence investors can buy Marico with a one year price target of Rs 74.