Golden Parachute

Marico, the home-grown consumer product company, faces severe competition from multinationals.

But it still has some strong assets. A report.

In the fast moving consumer goods idustry, few Indian companies command good valuation. Godrej Soaps trades at a price-earnings ratio of 10 and Nirma has a discounting of about 14. Marico is somewhat an exception; it trades at a slightly higher P/E of 18. This indicates a higher confidence.

The reasons too are clear. It has several strong brands. The first one is Parachute, which is almost a generic for coconut oil. In fact any new entrant in the coconut oil industry is packaged in a similar blue bottle. It remains the market leader in the branded coconut oil segment with Parachute accounting for over 51 per cent. Its other products include Saffola safflower oil, Sweekar sunflower oil, Revive starch, SIL jams and Hair & Care, a non-sticky hair oil.

 

Saffola is the only product of its kind in the market and enjoys a price advantage against the sunflower oil products. It commands an eight per cent market share. In edible oils, Sweekar has an eight per cent market share, second to Sundrops 10 per cent.

According to Rajat Sabharwal, Kotak Securities, The two new brands SIL and Revive are expected to break even in 1997-98. They are to serve as umbrella brands in their respective categories. Marico is planning to extend its SIL brand to include a lot of new table foods. Shreekant Gupte, vice president, marketing, says, SIL enjoys a market share of 11 per cent against Kissans 59 per cent. In non-sticky hair oil, there are only two major players, and even here, Maricos Hair & Care is second with a market share of 26 per cent, after Keo Karpins 60 per cent.

Marico operates in a commodity business; but it has taken on the business of upgrading these commodities to branded products right from the start. Over the years it has invested selectively in building brands. Four of the six brands have been launched in the nineties but the advertising budget has been very low (around 7-8 per cent of sales) compared to the other consumer products companies (about 12 per cent).

Maricos distribution network is in place and reaches 400,000 retailers through 1,400 distributors for Parachute. But, it plans to piggyback on this network to increase the penetration of other products. Till now, Marico was concentrating on distributing its products in metros and bigger towns which are bigger markets.

Another advantage that Marico has is that it is not a typical family-owned company. It has been a major recruiter at the top management institutes and has a professionally managed team. The management at Marico is more marketing oriented than other Indian companies, and this is evident from its success in brand building.

But there are enough problems. One concern about Marico is that Parachute may not continue to be as strong a brand in the future. It contributes to about 55 per cent of the turnover but is facing stiff competition from new entrants like HLL's Clinic Plus and Nihaar. Parachute and Clinic Plus compete in the same price segment, while Nihaar is cheaper. Thus, other brands might cause consumers to shift their brand loyalty in the future.

The market for Marico's other products is getting increasingly competitive. Though it has been a part of its strategy to stay away from markets like detergents where there is a dominance of multinationals, it is gradually losing ground to them in its own product categories. The major competitor for Marico in the edible oil segment is ITC Agrotech. Though ITC's Sundrop has been losing market share, it has launched Sundrop Carnola in the premium segment to compete with Marico's Saffola.

The company also faces uncertainty as far as its raw material costs are concerned as all the raw materials are agricultural commodities and have high price volatility. Moreover, raw materials account for more than 50 per cent of sales of Marico which is very high.

It has also not launched any new brands in the last three years. Rather it has withdrawn brand extensions like Parachute Amla and Parachute Herbal from the market. This does not bode well for the company which has to operate in a highly competitive market, where existing products are in constant threat from newer and improved ones.

Another concern is that two of its best brands, Parachute and Saffola, are not owned by Marico, but by a group company, Bombay Oil Industries. This acts as a dampener as the value of an FMCG company depends on its brands. It pays a royalty to use these brands. In the event of the promoters stake falling below 25 per cent, Marico will lose the right to use these brands. This means that in case of a takeover or sale, the benefits from the sale of these brands will accrue to the promoters and not to the shareholders.

Its performance has been good last year. The EPS has shown a 9.65 per cent growth in March 1997 at Rs 13.85. The operating margin dropped to 9.4 per cent from 11.2 per cent in 1995-96. Raw material prices went beyond control as the copra crop was short due to a storm in Andhra Pradesh. But it passed on the the increase in costs by raising the Parachute price on three occasions last year.

In March 1996 the company came out with its maiden public issue of 3.625 million shares at an offer price of Rs 175. Of these shares 1 million was a fresh issue and the balance was an offer for sale by the promoters. As a result the promoter group holding came down to 72 per cent. The proceeds of the issue, which amounted to Rs 17.5 crores was used for repayment of term loans and augment its working capital requirements. Despite the stiff market conditions at that time the issue was well received and oversubscribed twice. The stock has given its investors in IPO a return of 57 per cent in 18 months against the corresponding 14 per cent returns for the BSE Sensex. The market capitalisation to sales for Marico of 1.15 is a point in favour for the company.

Analysts believe that Marico's earnings will improve in the future as price realisations are likely to improve due to lower raw material cost. Sabharwal expects earnings to grow at a compounded annual growth rate of 26.5 per cent between fiscal 1997 to fiscal 1999.

It is also expanding capacity by starting a new plant in Ponda, Goa at a capital expenditure of Rs 32.5 crore. It will be funded by internal accruals. Analysts feel that it will help the company generate Rs 65 crore as free cash flows in the next two years. Marico's future plans also include repositioning of Parachute to address a larger target segment and launching cheaper variants of Sweekar to tap the price sensitive markets. Says Shreekant Gupte, we expect to grow by 20 per cent in sales over the next three years.

In the domestic market, the thrust will be on the rural market as only 11 per cent of its sales come from the rural market against 53 per cent for HLL. Sabharwal expects rural markets to contribute to 15 per cent and 20 per cent of sales in 1997-98 and 1998-99 respectively. Though its current exports are quite small, Marico is focussing its efforts on SAARC countries and the Middle East. As one of the few Indian companies to export branded products, it stresses on franchise creation rather than on the export value of sales.

Marico will remain attractive to investors because of its superior management, good distribution network and strong brands. Its return on capital employed at 32 per cent and market capitalisation to sales ratio at 1.15 are favourable. But it has a long way to go before it becomes comparable to the multinationals. In the short term, the earnings may get hurt due to the volatility in raw material prices. So, while the upside is limited in the short term, the stock is attractive for the long term.

Marico'sfuture plans include repositioning of Parachute to address a larger target segment and launching cheaper variants of Sweekar.