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Aarati Krishnan

DESPITE an appreciation of 16 per cent over the past two months, the Marico Industries stock may hold potential for further appreciation over the long term. But the stock may be suitable only to investors with an appetite for risk, as a significant portion of Marico's business portfolio is vulnerable to commodity price cycles.

The stock trades at a price earnings multiple of just over 11 times its 2002-03 earnings. This is substantially lower than those of most frontline FMCG companies. The stock appears ripe for an upward re-rating given reviving growth prospects for its key businesses. A clutch of strong brands in the few high-growth areas of the FMCG business (such as hair oils and skin care); a good hit rate with new product launches (Shanti Amla, Saffola blended oils and Mediker oil); and a steady expansion in the contribution from high margin products (value-added oils, skin care products) are Marico's key strengths.

Despite a sluggish FMCG market, Marico has managed an 11 per cent growth in net sales and a 12 per cent growth in net profits for 2002-03. Due to a conscious focus on brand building efforts (as opposed to freebies) and diversification of the product portfolio, Marico has managed to insulate its earnings to some extent, from the wild swings in commodity prices over the past three years.

Marico's near-term earnings prospects appear bright. Volume growth rates in the hair oil segment have continued to be healthy, despite the sluggish offtake for many FMCG products. The company's focus on low unit packs and its success with new launches in the value-added segment may help the company sustain higher growth rates than the market. After a shrinkage last year, volume growth in the refined edible oil segment may pick up in the current year, as edible oil prices have softened from their peak in 2002. A good monsoon may also help Marico's cause by improving input availability and propping up rural demand.

From a strategic perspective, too, Marico appears to have made all the right moves. It has broadbased its product portfolio through a slew of new launches. It has consistently gained market share on its bread-and-butter brands, in the face of intense competition from both MNC and regional players. The company also has a liberal dividend distribution policy, which has ensured that the surplus cash in Marico's coffers has found its way into the hands of shareholders at regular intervals. The company reported earnings per share of Rs 19 in 2002-03.

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