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| Marico: Stepping into unchartered territory | | Market gives thumbs-up to entry into personal care, but valuation a concern |
| Malini Bhupta / Mumbai Feb 17, 2012, 00:28 IST |
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 Marico’s bid to expand its footprint in the fast moving consumer goods (FMCG) business continues. By acquiring the personal care business of the erstwhile Paras Pharmaceuticals from Reckitt Benckiser, it has now entered categories, such as deodorants and hair grooming. Incidentally, Marico has been trying to change its revenue mix, dominated by edible and hair oils, for a while now. This acquisition gives it an entry into the fast growing personal care market.
The portfolio of brands it has acquired has a six per cent market share in deodorants, 24 per cent in hair-styling gels and 68 per cent in post-wash hair conditioners, claim analysts. The three large brands include: Set Wet, Zatak and Livon. While the personal care market is growing at a robust 14 per cent, Paras’ brands could be growing at a blended rate of 20 per cent, analysts say. Thus, the acquisition makes sense from a strategic point of view. What analysts like about this deal is the margin profile of the personal care business. Compared to other FMCG categories, personal care products typically enjoy gross margins of 50-60 per cent. From a strategy and margins point of view, this acquisition makes sense for Marico. However, analysts are concerned over the fact that this is a new category, where Marico does not have much expertise.
The price that Marico has paid for the deal is crucial for the stock’s valuation. Given that Reckitt acquired Paras Pharma for seven to eight times the revenues in 2010, the presumption is that Marico, too, has paid a similar price. Given that the personal care business of Paras is estimated to have revenues of Rs 150 crore, the size of the deal could be in the region of Rs 1,000 crore, at that valuation. In this case, MF Global says the deal would not be EPS accretive for three years at least and implies EPS dilution of nine per cent in FY13.
However, the other assumption is the deal could be four times sales, in which case it’s a positive for Marico and the deal will be EPS accretive from FY14. According to Edelweiss Financial Services: “The valuation could be as high as 4–5x sales as in India valuations in general tend to be higher.” Thereby, the deal could be EPS dilutive in the first year.
Marico plans to fund the acquisition through short-term debt and internal accruals. The company currently has cash on its books to the tune of Rs 400 crore and its debt-equity ratio is expected to be 0.7 in March 2012 without considering this purchase.
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