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Aarati Krishnan

Mr Harsh Mariwala, Managing Director - The company has a good hit rate with new launches.

SHAREHOLDERS can hold the Marico Industries stock in the light of the potential for ramp up in earnings from its new products.

Given the company's liberal distribution policy and the healthy payout ratio, the stock may also offer a rising stream of dividend incomes. However, the stock may hold limited potential for capital appreciation in the near term.

At a price-earnings multiple of about 14 times its 2003-04 earnings, its near-term growth prospects appear to be fully captured.

For the financial year 2003-04, Marico Industries managed a robust 14.8 per cent increase in its net sales to Rs 847.6 crore. After netting out one-time items from the previous year's numbers, operating profits grew 10.5 per cent to Rs 70.8 crore and net profits by 11.5 per cent to Rs 58 crore.

New products deliver

Several factors have helped propel Marico's sales growth despite a challenging business climate for FMCGs. First, the recent additions to Marico's product portfolio have scaled up their volumes, compensating for the sedate growth from its flagship brands.

While Parachute, Sweekar and Saffola have reported single-digit growth, extensions such as Mediker Anti-Lice and Parachute Jasmine have helped the hair oils business deliver a volume growth of 21 per cent. Second, the company has taken hikes in the selling prices of its products to compensate for input cost increases. This too, has contributed to the sales growth numbers.

Input costs spiral

Despite a conscious focus on profit margins, rather than volumes, Marico's profit growth for 2003-04 has lagged sales growth. Key commodity inputs such as copra, safflower seed and crude vegetable oil saw upward spiral in prices of between 20-30 per cent during the year.

The marginal rise in material costs, as a proportion of sales, suggest that Marico has been able to pass on the major part of this spike, though not all of it, to its consumers.

Going forward, the pressure on profit margins from rising input prices could ease, as prices of commodities flatten out after the sharp spike last year. But for earnings growth to jump into a higher trajectory, new products will have to continue to scale up their performance. On this score, there may be reasonable room for confidence.

Marico has at least five new products and extensions in the prototype stage, slated for rollout. It has also had a good hit rate with such launches in the past.

There is greater uncertainty about Marico's forays into new businesses such as the Kaya Skin Care clinics and Sundari LLC, which are still in a nascent stage. These will, however, not require high capital investments from the company.

Distribution policy a plus

But one positive factor for Marico shareholders is its liberal distribution policy. Over the past five years, the company has consistently stepped up its dividend payouts year after year.

It has also rewarded shareholders with a 1:1 bonus offer and an offer of redeemable preference shares in 2003.

In 2003-04, the total dividends announced by Marico amounted to Rs 8.5 per share, higher than the previous year's Rs 4.8, despite the expansion in equity base due to the bonus offer.

This being the case, the company's recently announced 1:1 bonus offer sends out a strong signal that the company expects payouts to be maintained over the coming years.

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