Marico, a relatively small name in the FMCG space, has strong presence in niche segments such as hair oil and edible oil.

Its launch of value-added products and successful use of Parachute as a brand extension strategy has resulted in higher margins. The company has also used inorganic route to expand its reach in domestic as well as international markets. Overall, Marico would like to build its presence in hair, skincare and wellness products.

Growth with high margin

It has transformed its portfolio by introducing high margin items like hair cream, gel, moisturiser, soaps, and skincare products launched through Kaya stores rather than through traditional low-margin products like Parachute hair oil, Saffola and Sweekar refined oil.

Also, the use of brand extension strategy and positioning the products differently in new hair oil, hair cream and refined oil products has worked well in commanding higher price. This has ultimately resulted in improvement of margins from 9.46% three years back to 13.23% in FY2007-08. However, advertisement expenses have also seen a jump in the same period. Its Parachute hair oil brand recorded 11% volume growth in FY2007-08.

It has also launched haircare products for children and functional food for health-conscious consumers. The rising income levels, growing brand consciousness, aspiration for higher spending on health and beautycare products have resulted in Marico products penetrating the market.

Marico, being the leader in hair oil and premium refined oil segments, offers a limited scope for further volume growth. To drive growth, it has leverage its strength in the hair oil segment by acquiring brands in different markets.

It acquired a handful of brands in overseas markets like the US, Bangladesh, Egypt and South Africa to drive further growth.

It has completed seven acquisitions, both domestic and international, since 2003. The highest investment of Rs 227 crore was when it acquired Hindustan Unilever?s ‘Nihar’ brand.

It has bought one brand in every market it entered. This has given it a foothold in these markets. Now, whether the company will leverage its presence in these markets and expand is a thing to watch out for.

Apart from acquisition, Parachute is also sold in the middle-east market. This was done to increase reach and drive volume growth. One more reason for acquisition could be to propel the Parachute brand in these markets.

The company has made an entry into the health and beauty space through the launch of 65 Kaya clinics till FY2007-08 in both the domestic and middle-east markets. This subsidiary could be one of the future growth drivers for the company. This arm has achieved a turnover of Rs 100 crore from Rs 21 crore in FY2004-05.

Performance

Marico?s financial performance has been strong and growth driven by volume rise and acquisitions.

In FY2007-08, its subsidiaries contributed about 18% to the consolidated sales and 15% to net profit.

One of the reasons for net profit growth in FY2007-08 was due to lower depreciation, less tax outgo and higher other income in comparison to the previous corresponding year. Some pressure could come from finance cost which is increasing at a faster pace due to incremental borrowing every year owing to acquisitions. For acquiring three brands, it increased borrowing from Rs 11.1 crore in FY2006-04 to Rs 358 crore in FY2007-08. Its remaining amount has come from internal accruals.

Valuation & concerns

From the equity market perspective, the FMCG sector is considered a defensive one due to higher dividend yield and lower growth as compared to other sectors. However, the sector is commanding healthy valuation due to stability in the business model.

If one looks at Marico?s valuations, FY2007-08 earnings per share is Rs 2.35 and price to earnings multiple is 23.08 times. Hindustan Unilever, Emami commands a P/E of 26.34(x) and 15.90(x) respectively.

If one considers fresh investment in acquisitions, return on capital employed would be under pressure. Going for more acquisition would stretch the balance sheet and result in drying of cash flows from old businesses.

Also, maintaining growth in all the overseas markets at the same time would be an issue. Further, increasing prices of Khopra and edible oil can affect the margin to a certain extent.