The consolidated sales of Marico Ltd grew 7.3% to Rs600 crore due to 14% volume growth in the fourth quarter. Lower input cost (copra prices down around 14% year-on-year, or y-o-y, and safflower prices down around 9% y-o-y) enabled gross margin expansion of 687 basis points (bps) y-o-y, but a 470 bps increase in advertising expenditure restricted earnings before interest, tax, depreciation and amortization margin expansion to 100 bps at 14.1%. Profit before tax grew 16.8% and adjusted profit after tax (PAT) fell 2.7% to Rs57.8 crore due to low tax rate in the fourth quarter of FY09 (tax credit on the Sundari sale).
Volume growth momentum remained intact for Marico even as value growth declined due to price cuts. Domestic sales growth of 6.7% was largely volume-led (14%) as product prices (both Parachute and Saffola) were lower y-o-y. Parachute volumes grew 10% y-o-y, while Saffola volumes were up 13% y-o-y. In the fourth quarter of FY10, hair oil volumes grew 27% y-o-y.
Graphic by Ahmed Raza Khan/Mint
Marico’s margins expanded as a fall in input prices offset declines in realizations.
We are positive about the management’s pricing strategy, which involves giving priority to building the franchise instead of expanding margins at the cost of volumes.
We also expect Marico to sustain its double-digit volume growth and value growth to be muted due to fewer price increases. We are factoring in the effect of lower excise provision up to 75% of the disputed amount; lower tax rates due to the commissioning of a new unit in Paonta Sahib; and the effect of price cuts in Parachute coconut oil. Our estimates factor in 16.8% sales growth over FY10-12; a 40 bps margin contraction in FY11 and flat margins in FY12. We are assuming a lower tax rate of 20% in FY11 and 19% in FY12. PAT is expected to post 21% compounded annual growth rate of over FY10-12. The stock trades at 23.7 times its estimated FY11 earnings per share (EPS) of Rs4.70 and 19 times its estimated FY12 EPS of Rs5.90.
The value growth was lower as Marico cut prices of 50ml packs (from Rs12 to Rs10) in November and of the 100ml pack from Rs21 to Rs20 (effected in January).
These stock-keeping units (SKUs) are converter packs and their widening premium to loose oils affected consumer upgrading to branded coconut oil. We estimate these SKUs account for around 20% of Parachute volumes, which would reduce average portfolio realizations by 2.5%. The effective price cut would be lower due to a 2.5% price increase in the 200ml SKU (from Rs39 to Rs40), estimated at 40% of sales. While the price cuts have affected value growth, margins have improved due to a 14% decline in copra prices. Marico has moved from making 100% provision for excise on the less than 200ml SKUs of pure coconut oil to a 75% provision, effectively reducing the annual provision from around Rs45 crore to around Rs35 crore. Provision at 100% this quarter would have resulted in adjusted PAT of Rs49 crore.
Saffola continued to benefit from its “good for the heart” positioning, posting volume growth of 13% y-o-y. The management has withdrawn the promotional offer (20% extra), which led to deceleration in volume growth (18% in the third quarter of FY10). Hair oil volumes grew 27% y-o-y during the quarter and the volume market share in the value-added hair oil market was 21%. Marico cut prices of its amla oil variant Shanti Badam Amla by 12-30% to capture market share from market leader Dabur Amla.