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Aarati Krishnan

A COMBINATION of events has made the March 2003 quarter a taxing period for Marico Industries. After managing a 17 per cent growth in its net profits and a 13 per cent growth in net sales in the first nine months of 2002-03, Marico's growth numbers have slowed appreciably in the final quarter of 2002-03, to a 5.6 per cent growth in sales. Net profits for the quarter fell from Rs 15.4 crore to Rs 15.1 crore.

But this is not a bad showing from Marico, considering a couple of points.

Net profits would have actually registered growth and not a decline, but for a sharp hike in Marico's advertising and promotional (A&P) expenses from Rs 9.7 crore to Rs 14.8 crore for the quarter. Though raw material costs continued to head upwards during the quarter, operating profit margins remained at previous years' levels, excluding the A&P spend.

Full year: Low realisations

The insipid last quarter has weighed on Marico's financials for the fiscal 2002-03. For the full year, Marico posted a growth of 11.3 per cent in net sales to Rs 738.2 crore. Net profits for the year grew 7.7 per cent, from Rs 49.3 crore to Rs 53.1 crore.

The double-digit sales growth, in a tough year, is explained by two factors. One, categories such as hair oils (20 per cent volume growth), exports (42 per cent growth) registered robust volume growth. Second, even in categories (such as refined sunflower and safflower oil), where volumes have actually shrunk, selling prices have moved up sharply on the back of firmer commodity prices.

Gains in hair oils, losses in edible oils

During the year, Marico managed to make market share gains in the coconut and hair oil businesses, with the help of existing brand extensions such as Parachute Jasmine and Shanti Amla, and new launches such as Mediker anti-lice oil. The prices of the key raw materials such as copra were up by 30-40 per cent in relation to last year. But a foray into value-added oils and price hikes appear to have helped Marico pass on these increases to consumers in the hair oils business without ceding market share.

But the edible oil business has been a tougher proposition. As the prices of key inputs spiralled upwards, Marico has been forced to hike prices of its key brands. But, here, price-sensitive consumers have switched to cheaper substitutes. As a result, through 2002-03, Marico's market share in the refined oil business, slid from 11.7 per cent to 9.5 per cent. The shortage of inputs for the safflower oil business further shrunk volumes.

Going forward, prospects for the refined oil business could continue to be sedate, especially after the recent decision to impose excise duty on refined oil marketed in consumer packs. But for Marico, this could be compensated by a higher contribution from its recent product launches (Shanti Thanda Tel, Parachute Jasmine, Saffola Nutri-Blend and Saffola Tasty Blend) and its new business forays.

In the recent times, Marico has added substantially to its portfolio of businesses by venturing into skin care clinics (Kaya Aesthetics), high-end cosmetics (Sundari Llc) and soya-based foods (Mealmaker). Indeed, product launches is one area where Marico has made steady progress. Revenue from new products rose from around 4 per cent of revenues in 2001 to 17 per cent in 2003.

Giveaways

In the three years to 2001-02, Marico rewarded shareholders in a slowing market, by stepping up distributions. Dividends rose to Rs.14 per share in 2001-02, but have fallen to Rs.4.75 per share in 2002-03.

The per share dividends appear to have declined mainly due to a 1:1 bonus on equity shares, and bonus preference shares in the ratio of 1:1 issued earlier in 2002-03.

Given the sedate near-term prospects, there appears to be scope for some downside in the stock price over the next one year.

Investors can however use a 5-10 per cent decline from current levels to add the stock to their portfolio for the long term. The trades at a price earnings multiple of nine times its 2002-03 earnings.

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