Our Call. Marico: Buy

After trailing the FMCG pack for most of 2013, Marico’s stock has raced ahead in the year so far. Its year-to-date return of 24 per cent is above most in the FMCG pack, save a few such as Hindustan Unilever, Britanniaand P&G Hygiene.

Even so, Marico’s valuations are cheaper, at 33.6 times trailing earnings. The stock is below Dabur’s 37.9 and HUL’s 47.9 times. On estimated earnings for 2015-16, too, at around 27 times, Marico is cheaper than most FMCG stocks. Investors with a two-year horizon can still buy the stock.

Marico is present in the growing FMCG segments of health foods, male grooming, skincare, and value-added hair care. The company’s value-added hair oil business — through brands such as Parachute and Nihar, and Hair & Care — grew 18 and 28 per cent in the past two quarters, respectively; a good recovery from the 16 per cent in the September and December 2013 quarters.

Marico also has a strong rural presence, where growth rates are still above those in urban areas.

Most of the company’s brands are market leaders, with several even gaining market share in the past year — Parachute, Nihar, Saffola, Livon and Silk & Shine in domestic markets, and Hair Code and Fiancee (Egypt), and Parachute in Bangladesh. It is these market-leading brands that have helped boost sales in the past few quarters, even as the others found the going tough.

Brand strength also accords pricing power. The prices of key input copra skyrocketed in the past one year, rising 89 per cent between June last year and now. The company, therefore, hiked product prices by around 33 per cent over the year in Parachute.

In immediate response, volume growth slid, to one and two per cent in the September and December 2013 quarters, respectively. But with consumers gradually accepting the higher prices, volume growth bounced back in the March and June 2014 quarters to 10 and 6 per cent, respectively. Overall volumes rose to 5 per cent by June from 3 per cent in the December 2013 quarter.

But the price revision didn’t entirely compensate for the input cost rise. The raw-material-to-sales ratio crossed 50 per cent in late 2013, reaching 55 per cent by the June 2014 quarter. Packaging material also turned pricey.

Thus, operating profit margins began shrinking from the second half of FY14. The June 2014 quarter saw margins dip three percentage points to 15.1 per cent.

But copra prices, though still high, have stabilised in the past couple of months, reducing the uncertainty over costs. Prices of other inputs, such as rice bran and safflower oil, have been benign. So, while the operating profit margin in the coming quarters may continue to be comparatively lower, the pressure on maintaining it may ease.

Marico’s overseas markets compensated for the slower domestic market, growing at 14-15 per cent. Combining acquisitions and exports of its own brands, Marico cornered market leader positions. Barring South Africa, the other regions the company operates in — South-East Asia, West Asia, Bangladesh, Vietnam, and Egypt — offer good prospects over the medium term.