Multi Baggers

Marico

Transformation into a complete FMCG player:
 
Marico dominates the Rs 13 billion branded coconut oil market with flagship brand Parachute (48% market share) and enjoys No.2 position in the edible oils market with brands Saffola and Sweekar. Over the years, Marico has made constant efforts for diversifying its revenue base into other categories like hair care (Parachute Therapie), skin care (Kaya & Sundari), soaps (Parachute Jasmine, Manjal, Camelia & Aromatic) and functional foods (Saffola Atta, Saffola Diabetes Atta Mix). As a result, its heavy dependence on the Parachute brand has reduced sharply (from 75% of revenues in 1990's to 40% in Q2 FY09). We believe this re-positioning will strengthen the company's brand equity and help transform itself into a complete FMCG player.

Business structure:-

Kaya Skin Clinics - a highly scalable model:
 
Kaya Skin Clinics has made a name for itself in the advanced skin care segment. With 77 clinics (67 in India and 10 in the Middle East), the Kaya business has broken even at the operating level with operating profit of Rs 50 milion (revenues Rs 1 billion in FY08, Rs 760 million in H1 FY09). Apart from skin care solutions, Marico also markets cosmetic dermatological skin care products and offerings under the Kaya brand. The product sales now comprise 12% of Kaya's revenues. The venture is a highly scalable one and represents an avenue of steady revenue stream. In an attempt to tap the fast-expanding organised weight-loss market, Marico has launched 'holistic weight loss' centers under the Kaya Life brand in FY08. Currently, there are three centers in Mumbai under this venture. This venture offers weight loss solutions that are customized to individuals and is expected to start contributing to net earnings from FY10.

Rising share of international business to drive growth:
 
Marico's strategy of expanding into related international markets with significant potential demand for its existing products such as Bangladesh and Middle East has paid off handsomely. The international business (main areas of operations in Bangladesh, MENA and South Africa) currently contributes 16% (Rs 3 billion) to the total turnover. It has successfully launched various product variants by capitalizing on mother brand 'Parachute' and is gradually increasing its presence in the overseas markets. (Parachute coconut oil has achieved a leadership position in Bangladesh with 70% market share while, in the Middle East market, Parachute cream has achieved 29% and 15% market share in the UAE and KSA respectively.) Marico's product variants have started gaining strong volume market share across the globe.We believe the rising contribution from international business and potential acquisitions will help Marico in maintaining consistent growth.

Financials:

(Source: Company, India Infoline Research)

Valuation and recommendation:
 
With 25% of the company's turnover coming from the rural market, a sizeable portion of Marico's revenues are likely to be resilient in the current uncertain environment. This is because rural India has benefited from years of good monsoon, farm loan waiver and incomes have been rising at a faster pace than urban India.

We expect Marico to witness 20% CAGR in net profit over FY08­11E. Operating margin is likely to remain under pressure due to firm raw material prices (copra, sunflower). However, we believe it will mitigate input cost impact by implementing material price hikes across products. The stock is trading at around 12.9x FY11E EPS of Rs 4.4. We recommend BUY with a price target of Rs 69, an upside of 22.1%.

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