Company Name – Marico Limited (Marico) Current Share Price – INR 529 (May 24, 2022) Market Cap – INR 68,382 cr |
1. What is interesting about the stock?
Who doesn’t like looking good? Men and women alike, spend hours fixing their hair either at home or in beauty parlors, aspiring to have flowing locks and silky hair. So much so that even Bollywood is obsessed with ‘zulfen’. From ‘Udein Jab Jab Zulfen Teri’ to ‘O Haseena Zulfonwaali’, Bollywood has churned out multiple melodies appreciating well-groomed hair. In 1974, Harsh Mariwala picked up on this aspect of human behavior and envisioned a branded FMCG market for coconut oil. He realized that MNCs are not present in hair oiling as it exists only in India, neighboring countries, and the Middle East. In 1980, the ubiquitous Parachute blue bottle was conceived. Up until then, hair oil was sold in tins. Mariwala and his team developed a bottle design that would be rat-proof and invested all the savings from the usage of plastic instead of tin, into advertising. The innovative strategy helped the company evolve from almost 0% market share to becoming the market leader.
Today, Marico is one of India’s leading FMCG companies operating in beauty and wellness categories. The company has a presence in over 25 countries in Asia and Africa and has a diversified portfolio with well-established brands across categories of hair care, skin care, male grooming, edible oils, healthy foods, and fabric care. Brands in the company’s portfolio include Parachute, Nihar, Hair & Care, Livon, Set Wet, Mediker, Beardo, Black Chic, X-Men, Saffola, Kaya, etc. Marico has more than 60% market share by volume in coconut oil and ~37% market share by volume in value-added hair oils. In FY21, coconut oil contributed 43% of domestic revenues while value-added hair oils and Saffola edible oils contributed 22% and 27% respectively. International operations contributed 23% of group revenues with a significant presence in Bangladesh, Vietnam, the Middle East, South Africa, and Egypt. Bangladesh is a strategic market for the company contributing to 49% of overseas revenues. Over the last 15 years, the Company has actively pursued acquisitions to broaden its product portfolio, accelerate category leadership, enter new categories and build scale through consolidation. Brands acquired (including strategic investments) are:
2006: Nihar, Fiancee
2007-08: Black Chic, Hair Code, Caivil
2010: Code 10
2011: X-Men
2012: Set Wet, Livon
2017-18: Beardo, Isoplus, Revofit
2019-20: Pure Sense
In healthy foods, Marico has also launched a wide range of products under the Saffola brand including oats, honey, soya chunks, chyawan amrut, nut butter, spreads, and immunity-building products (Kadha mix and a Turmeric milk mix).
“The biggest asset for an FMCG company is the brand and distribution network. I would prefer not to own a single factory but would like to sub-contract everything because that’s not where we add value. We add value in the area of brand building and distribution which is done fundamentally through good talent and innovation.” – Harsh Mariwala
Marico currently has a direct reach to ~914,000 outlets and an overall reach of 5.3 million outlets. 72% of the revenues are generated through general trade outlets, 22% through modern trade & e-commerce, and 6% through CSD. Two-thirds of the sales are generated in urban centers and one-third in rural regions.
Key competitive advantages of the Company are:
Market leadership in coconut and value-added hair oils (Refer to the table below)
Extensive distribution network that can be leveraged to propagate new/acquired products
International operations that lower India centric risk
Professional management that has been groomed over decades
* Market share by value. Rest are market share by volume.
2. Key Historical Financials
International operations are key in driving the company’s growth. In Q4FY22, India’s revenue grew by 5% while international revenue grew by 12% resulting in a consolidated Y-o-Y growth of 7%.
In FY22, Parachute grew by 11% in value terms and 5% in volume. The Company hopes to achieve 5-7% medium-term volume growth. During the same period, value-added hair oils grew by 14% in value terms.
Financial metrics are well managed with the company maintaining negative net debt (net cash balance at ~ INR 1,000 cr as of March 31, 2022), very high-interest coverage, and a one-month working capital cycle. However, both EBITDA and PAT margins fell by ~2% in FY22. This has primarily been due to a 27% jump in the material cost in FY22 against an 18% increase in revenues.
Cash flow convertibility (CFO/EBITDA) improved to 130% in FY21 with a fall in working capital levels and has normalized in FY22 with working capital coming back to 30 days. I would expect Company to generate CFO to support the annual dividend outflow of ~ INR 1,100 cr and build some cash balance (~INR 200 – 300 cr) in the next couple of years
ROE/ROCE is quite healthy at 45%/37% in FY22
3. What is my view on company valuation?
Marico is currently trading at an EV/EBITDA (TTM) ratio of c. 42x and a P/E (TTM) ratio of c. 56x. This is slightly higher than competitors such as Godrej Consumer and Dabur which are trading at P/E (TTM) ratios of 44x and 49x respectively. Globally, Unilever PLC and P&G are trading at P/E (TTM) ratios of 18x and 25x respectively. FMCG companies have a history of trading at a premium in the Indian market.
In the medium term, the Company is expected to grow volumes by 8-10% and revenues by 13-15% while maintaining around 20% operating margins. While Marico is a fundamentally strong business with a domestic and global distribution network as its backbone, the projected growth rates do not warrant the current trading multiples. However, it is a stock worth accumulating on dips and holding in the long term for stable healthy returns.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Continuous competitive pressure from Dabur, HUL, Patanjali, etc., and emerging DTC brands.
Inability to increase the contribution of products other than coconut oil, value-added hair oils, and Saffola oils from 8% (domestic revenues) to a more meaningful share.
About the Author
I have over 15 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.