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Optical Marico

Optical Marico

Marico Limited is one of India's leading consumer products groups in the global beauty and wellness space. The company is amongst the leading beneficiaries of the changing preference of Indian consumer for better personal care and food products. It has established strong ground in its core categories such as hair oil and edible oil with dominant market shares. It has been able to distinguish itself by offering niche products through brands such as Saffola (flavoured oats), Livon while extending Parachute to various new generation hair care products such as hair creams and value‐added hair oils.

Present in 25 countries across emerging markets of Asia and Africa, Marico has nurtured multiple brands in the categories of hair care, skin care, edible oils, health foods, male grooming, and fabric care. Marico's India business markets household brands such as Saffola, Parachute, Parachute Advansed, Hair & Care, Nihar, Nihar Naturals, Livon, Set Wet, Mediker and Revive among others. The company has been at the forefront of launching innovative products and services such as Saffola Savoury and Sweet Oats to provide Indian consumers with premium personal care products. Marico acquired Paras Personal Care Business getting access to brands like Set Wet, Livon and Zatak. De-merging of Kaya business in 2013 has made Marico Ltd. a pure‐FMCG player.

The international business contributes 23 per cent of the group’s revenue, offering unique brands such as Parachute, Caivil, Hercules, Black Chic, Code 10, Ingwe, X-Men and Thuan Phat that are localised to fulfil the lifestyle needs of our international consumers. Marico has captured inorganic growth opportunities with acquisition of two hair care brands in Egypt, Fiancee and Haircode, which gives it control over 50 per cent of the hair care market in the country. Further, it has acquired three soap brands in Bangladesh and cross-pollinated brands value‐added hair oils, hair dyes, deodorants, et al, to expand its presence in Bangladesh.

During financial year 2015-16, the company charted an annual turnover of Rs 6,100 crore across the portfolio. Marico's focus on sustainable growth manifests through its consistent financial performance, a CAGR of 10 per cent in turnover and 18 per cent in profits over the last five years. In India the company has eight factories located at Pondicherry, Perundurai, Kanjikode, Jalgaon, Paldhi, Dehradun, Baddi and Paonta Sahib.

For the April-June’17 quarter, Marico’s top-line, EBITDA and bottom line plummeted by 4 per cent, 13.3 per cent and 11.9 per cent all on year on year basis (YoY), respectively.

Domestic Business: De‐stocking impacted volumes; copra exerts pressure on margins

The domestic business declined by 4 per cent YoY, with 9 per cent YoY drop in India volumes due to GST related destocking in June. The management alluded that it has underestimated the transition impact of GST.

GST related de‐stocking led to volume pressure across segments – Parachute coconut oil, value added hair oil (VAHO) and Saffola de-grew in terms of volume by 9 per cent, 8 per cent and 9 per cent all in YoY, respectively. The company garnered more than 90 per cent of the market share of portfolio across these three segments. The overall impact of GST on Marico was positive and the company is passing on the benefits of tax rate reduction to the end consumer by reducing maximum retail price in the Value-Added Hair Oil and Saffola Edible Oil categories.

More than 90 per cent of the portfolio continued to gain market share on 12 months MAT basis. The North and East markets were impacted more than rest of India due to GST transition and the salience of South and West is higher for the company.

The second quarter of 2018 is expected to return to normalcy to a large extent, though there are still some issues inCanteen Stores Department (CSD), wholesale and East India; the wholesale, rural stockist and CSD channels are still under some pressure.

For the remaining fiscal 2018, Marico is confident of 8 to 10 per cent YoY volume growth.

Pipeline: The pipeline correction was steep in wholesale and rural.The domestic business did not push inventory in the trade which led to some stock out. However, competition has stuffed inventory. The company continued to operate on the automatic replenishment mode; it will take some time for the inventory pipeline to return to previous levels. Hence, it will not be easy to recoup losses due to loss of sale, as a result of stock out, at the retailers’ end.

CSD and institutional sales: These representing seven per cent of domestic turnover were the worst impacted and plummeted 15 per cent in the first quarter of 2018 due to complete blackout in June. Recovery in the CSD channel is expected towards end of second quarter of 2018. CSD sales were also impacted in July.

Wholesale: Wholesale is 35 per cent of the total general trade for the company. In the medium term, players with a model dependent on cash sales and wholesale will be heavily impacted. Additionally, business to business and cash‐and‐carry can replace traditional wholesale in the long-term impact due to increased cost of compliance.

Modern trade: In the first quarter of 2018, sales in this channel contributed 10 per cent of India turnover, continuing a good run with growth of 11 per cent YoY. In second half of June 2017, modern trade stopped purchasing.

E-Commerce channel:

Marico believes that it will become over indexed in e‐commerce compared to other companies and has got a separate team to handle the channel. Over the next six months, the company will be taking digital initiatives where some brands will be sold through e‐ commerce. E‐commerce will be one of the biggest drivers of growth over the next four to five years.

International business: International business of Marico dipped by one per cent YoY in sales and grew 6 per cent YoY in constant currency growth (CCG) and clocked one per cent growth in volume terms, which was the highest growth in five quarters.

Copra prices ramped up 69 per cent YoY leading to gross margin pressure – inflationary environment bodes well for Marico as it leads to market share gains from unorganised players, which comprises of 30 to 35 per cent of coconut oil market. Moderate inflationary environment will also swing the competitive position to Marico’s advantage as it will exert pressure on working capital requirements of marginal players. This will lead to market share gains and better volume growth. International business is showing early signs of revival in pockets like Bangladesh and Vietnam.

Bangladesh: Bangladesh posted highest growth in ten quarters in double digit constant currency growth of 12 per cent YoY. The company increased prices in the coconut oil portfolio by 10 per cent towards end of fiscal 2017.

The company has 87 per cent market share in coconut oil in Parachute in Bangladesh and the market is 85 per cent organised. It will also participate in male grooming in Bangladesh; male grooming and colors are promising segments in Bangladesh.

Bangladesh VAHO segment: It grew 28 per cent in local currency terms. To mitigate the impact of increase in inputs costs, Marico hiked prices by 8 per cent in VAHO portfolio in the later part of fourth quarter of 2017. The company is confident of double digit growth in this business and is targeting to become market leader in VAHO in Bangladesh.

Southeast Asia: Business in Southeast Asia, especially in Vietnam, grew by 7 per cent YoY in local currency terms; it is targeting double digit growth in second half of the 2018.

Middle East and North Africa (MENA) region: The business in local currency terms declined 14 per cent YoY in the first quarter of fiscal 2018 over the previous sequential year. During the quarter, business in Middle East declined 6 per cent on cc terms, where Egypt business declined 27 per cent YoY in fiscal 2017 in CC terms as down‐trading continued in both the markets.

The management believes growth in MENA has bottomed out. The business is expected to get back on growth trajectory in the second half of the financial year 2018. However, political turmoil and currency devaluation in the region is taking a toll. The company lost market share in body lotion, deodorants and some brands in the Middle East.

MENA region posted higher margin due to lower ad spends. International geographies, excluding MENA, witnessed constant currency growth of 10 per cent YoY.

South Africa: South African business of Marico grew in local currency terms of 5 per cent YoY. Recently, Marico has announced acquisition of business including related intellectual property rights of “ISOPLUS”, a leading hair styling brand in South Africa. This strategic buyout will enable Marico South Africa brands to become a full spectrum ethnic hair care company in South Africa.

Other countries: The company is under indexed in Nepal and Srilanka and hence has a lot of low hanging fruits in terms of growth. In Myanmar, the company is estimated to clock USD10mn sales in 2019.


The domestic business margin was impacted by significant increase in input costs and no price increase in the wake of GST implementation. The gross margin fell by 4.3 per cent YoY due to higher copra prices and EBITDA margin corrected by 2.05 per cent YoY, though contained by savings in ad spends, which decreased by 2.35 per cent.

In the medium term, Marico will be comfortable with 20 per cent EBITDA margin in the domestic business. The expenses for advertisements are expected to return to 11‐12 per cent in the medium term.

The prices for copra are nearing peak and the company expects these prices to rise further in the second quarter of 2018 fiscal.

To address the high‐margin problem in the hair fall segment, the company focused on the solution by addressing Advanced Ayurvedic Gold Hair Oil in non‐Southern states, especially when the natural and ayurveda segment is gaining significant traction.

Performances across Urban and Rural

During the first quarter of 2018, Marico’s rural sales declined 11 per cent YoY in the run up to GST, whereas the urban sales remained flat. The company is going in a methodical way in rural region, starting in multiple states. Marico is also trying differential servicing to the retail channel.

Urban class comprises of 65 to 70 per cent of sales for Marico. The company remains one of the key beneficiaries of revival in urban demand, which will be helped by the Seventh Pay Commission and One Rank One Pension.

Marico has been focusing on incubating ideas preferred over inorganic growth and expanding both rural and urban distribution. It has enhanced rural reach by 25 per cent to 50,000 villages during 2012-14. The recovery in rural growth will further help the company as it has taken steps to enhance penetration in rural areas—launched Sarson Tel and five rupees SKU of Nihar Shanti Amla, and recently also launched the rupee one sachet of Parachute Advansed Jasmine in Gujarat.

The company is also set to gain from urban initiatives like Project ONE to increase distribution in top‐six metros.

Parachute Range

The volumes in the Parachute rigid portfolio in India deteriorated 9 per cent YoY with value growth of 3 per cent YoY. The last price increase was taken in March 2017 of 8 per cent. The company chose not to take any further price increases and has not seen any price increase in the portfolio in July 2017. The company held back price hikes despite increase in copra prices due to GST. Copra prices jumped 7 per cent on a sequential basis YoY.

Saffola segment

The category gained market share of 2.03 per cent. Saffola refined oil saw 8 per cent YoY decline in value and 9 per cent YoY slumped in volume. The short‐term outlook for the blended oil franchise is positive with double digit volume growth prospects.

Owing to GST, Marico has cut its price in category of Saffola by three to four per cent. In addition to this, growth of the segment was also impacted due to higher dependence on GST. The growth of oats franchise was muted during the quarter. The CSD channel is more salient in Saffola segment in double digits.

Saffola is relaunched in new packaging with benefit positioning for each of the variant derived from factors affecting heart health. Premiumisation in Saffola through launch of Aura is the right strategy to address top tier of the market. The key positives of the category are renewed focus to drive volume growth coupled with price hikes and sustaining market share gains.

Value added hair oil (VAHO) category

The volume and value for the VAHO segment have decreased by 8 per cent and 7 per cent YoY, respectively. The company has reduced its prices in the segment by 5 per cent due to GST. The brand Sarson Tel is witnessing green shoots and Dabur Sarson is the lead brand in this segment.

The company’s initiatives in VAHO segment, including rupee one sachet of Parachute Advansed Jasmine in Gujarat, new five rupees spout pack of Nihar Shanti Amla, Nihar Naturals Sarson Kesh Tel extended to the Hindi‐speaking states of North and East, Parachute Advansed Ayurvedic Oil will gain share in the hair fall category in non‐South regions, which will help extend market share gains.

The portfolio is impacted by higher dependence on rural and wholesale channel but market share gains continue. On quarter to quarter basis, the company has gained 100bps share.

Youth portfolio: male grooming and premium hair nourishment

The portfolio as well the male grooming range of products value declined by 23 per cent YoY while premium hair nourishment portfolio weakened by 25 per cent YoY in value terms. The portfolio will neutralise in the second half of the fiscal 2018.

In the category of premium hair nourishment, the impact of destocking was felt the most, however the market share gains continue. This portfolio comprising Livon and Silk‐n‐Shine declined by 25 per cent YoY in value terms as destocking impacted the portfolio due to comparatively higher trade pipeline.

Whenever destocking happens, the retailers stock the leader brand and destock the fringe brand more. Hence the impact on this portfolio has been higher. The channel protects the core during destocking.

New launches and initiatives

The company has launched and taken several initiatives to re-brand itself which has worked in its favor. Most of these new launches have been introduced in the months of May and June’17.

  • Parachute Advansed Aloe Vera Hair Oil, which is now available in the markets of Maharashtra, Andhra Pradesh, Telangana & Tamil Nadu continued to show traction and grew healthily.
  • Marico has laid focus on innovations in the fast growing male grooming segment. It has launched Parachute Advansed range hair cream and oil for men and beard gel under Set Wet, deodorant at the disruptive Rs 49 price point.
  • Under the Hair & Care brand, Marico has launched fruit based hair oils, which are available in two variants.

Positive stance for Marico

Going forward, Marico is expected to recoup growth in 2018, led by pricing growth in Parachute, new product launches, recovery in youth portfolio, market share gains amidst inflationary environment and improvement in international business. Improvement in sales and margins of international businesses will aid to consolidated performance. At current market prices of Rs 326, the stock is trading at 37.9 times its expected earnings of 2019.

This quarter has been an aberration due to GST related destocking; post this quarter the overall growth is expected to normalise in the third quarter of 2018, which coupled with higher pricing growth bodes well for overall top line.

Risks for Marico

The biggest share of Marico’s top line and bottom line comes from the coconut oils and the prices for copra have been hardening over the last few quarters; margins can substantially hurt with greater‐than‐expected inflation. Copra prices are to be monitored closely. In addition, appreciation of the rupee against Egyptian pound, Bangladeshi Taka and other international currencies puts the growth in revenues and profits at risk.


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