>MARICO (FIRST GLOBAL)

Weathering the downturn: Strong brands & a rural focus help Marico sustain growth in consumer goods; Kaya skin care & the global business are less insulated

Decline in raw material prices will have a positive impact on margins in the short to medium term

The Story…
Marico Ltd. (MRCO.IN/MRCO.BO) has an unflappable image – no leaky-topline-shrinking margins recession story here. While others in the FMCG business negotiate a painful downturn, Marico almost seems to be sailing through the bad times… almost... In FY09, revenues were up by a robust 25%, higher than the 22.5% growth achieved in FY08 and 21% in FY07. With no
acquisitions during the year, organic growth was 13% while 12% was inflation-led growth. Both flagship brands – Parachute in the coconut oil category and Saffola in the edible oil category clocked volume growth of 9% and 11% respectively.

The company did experience some slowdown in the final quarter (Q4 FY09) when growth slipped to 20% Y-o-Y, down from 23.2% during the same period in the previous year. But EBIDTA margins for the quarter, quite remarkably, expanded to 13.1%.During the same quarter HUL -- just to take the example of the largest FMCG company, which is actually not strictly comparable in terms of size or product range -- suffered a drastic deceleration in sales growth to a mere 6% Y-o-Y from 16% in the previous year, and there was the added trauma of a margin squeeze.

How did Marico beat the slowdown so? Did its consumers not downtrade? Did it manage to
exercise the pricing power it enjoys on its flagship brands? Here’s what is really interesting: Far
from recession-induced downtrading in FY09, Marico had consumers in the rural segment upgrading from loose coconut oil to Parachute. Marico successfully leveraged on the rural market opportunity (arising from higher disposable incomes due to better realization on farm output) by the introduction of low-cost, small-unit packs promoted through van campaigns held close to rural households. What is even more remarkable is that Marico went ahead with an intrepid 5% increase in the price of Parachute in Q3 FY09, and still managed a volume growth of 9% for the year. Clearly, the impressive performance of Marico’s domestic consumer products business, led by Parachute inthe coconut oil category, is attributable to its undisputed position of leadership – Marico is not only a market leader in branded coconut oils, it also enjoys this position in other select niche categories like fabric starch and anti-lice treatment.

Going forward, apart from its focus on the rural market, Marico’s growth is also likely also be driven by product innovation in the high-growth beauty & wellness segment. Marico is leveraging on the brand equity of Parachute and Saffola and introducing newer variants to drive market expansion. Marico will also continue looking for strategic brand acquisition opportunities in domestic as well as international markets. Marico’s skin care solutions business offered through Kaya clinics (6% of revenues) and its international consumer product business, have been growing in importance in recent years. Both these businesses have been vulnerable to the economic downturn and may experience slower growth.

Things look good for Marico on the margin front too. Its EBIDTA margin was a healthy 12.6% in FY09. The company expects copra prices to ease in the near future, and this will have a positive impact on margins in the forthcoming quarters. But some of the benefit could be offset by the planned reduction in the price of Saffola and the increase in the advertising and sales promotion budget.

Valuation
The stock currently trades at a P/E multiple of 18.8 times our FY10 earnings estimates, which appears attractive in comparison to its peers, given the company’s strong fundamentals, higher RoE, growth potential in new ventures and efficient management. We expect the company’s earnings to grow 16% (excluding extra ordinaries) for FY10. We reinitiate coverage on Marico with a rating of Moderate Outperform.

Outlook
Marico will continue to weather the recession well. The company has the wherewithal in the form of strong brands, market leadership, capabilities in product innovation and pricing power to sustain healthy growth and profitability through the downturn and recover from any setbacks -- if there are any at all.

We expect healthy a 6-8% growth in volumes of coconut oil in medium term to be driven by rural demand for low-value, flexi-packs in coconut oils, value-for-money products in edible oils and hair care categories. We expect Parachute oil to contribute over 30% of revenues of Marico in FY10. Its new product launches i.e., coconut oil variants under the Parachute brand, health foods under the Saffola brand and variants of fabric starch under Revive, will help in expanding its consumer base.

Of its key brands, Parachute will continue to grow in strength and will steadily attract consumers out of the Rs.10 bn loose oil segment. We believe growth will essentially come from volume increases, as Marico is unlikely to risk further price increases in any of its categories under recessionary conditions. Saffola is likely to regain volume growth in response to reduced prices and edible oils contribution will be around 20% of its revenue.

Things look good on the margins front as well, as following the increase of 25% in copra prices in FY09, the company expects prices to cool off in FY10. However, the planned increase in advertising and sales promotion expenses and a reduction in Saffola prices could offset some of the gains. We, therefore, expect an EBIDTA margin of 12.7% for FY10.

There are some concerns regarding Marico’s Kaya skin care services business, as a prolonged recession could adversely impact discretionary spending on high-end services of this nature. While the company plans to continue expanding its network of clinics, the growth may slow down and the business could take longer to break even.

Key Growth Drivers

• Strong rural demand
• Brand extension & product diversification
• Inorganic growth: Brand acquisitions in domestic & global markets

To see full report: MARICO