Marico’s fiscal 2015 revenue growth of 22% and earnings growth of 18% were in line with our revised forecast. India business (78% of total revenues) led the way with a 26% growth and International regions (22% of revenues) lagged at 10%, as the firm makes key distributor changes in Egypt and sales in Bangladesh suffered due to political unrest.
The India hair oils business continues to push full steam ahead, with volumes in Parachute branded hair oil up 9% and those in other value added hair oils up 10%. All hair oil brands continued to gain market share in their respective categories. Despite the fact that some of this was on the back of price reductions taken by the firm, we believe Marico’s brands are valuable intangible assets. The company has a history of taking pricing action to make its branded product more competitive against the unbranded local competitors. However, despite reductions prices of Marico products continue to sell at a premium to competing products. With the focus on further differentiating its product by introducing new hair oil variants (such as the Parachute Aromatherapy oil launched by the firm last quarter) will continue to aid margin expansion by selling smaller quantities of hair oil at a more premium price. Our outlook on this narrow moat stock continues to be upbeat.
As anticipated, the firm continues to expand its EBIT (earnings before interest and tax) margins. The 40 basis point improvement in EBIT margin to 14.7% is a reflection of the firm’s increased focus on improving margins along with volumes going forward, through innovation and introduction of premium products. Marico is well-positioned to follow through on this strategy, with some successful innovations in the body lotion and oats categories already behind it.
We continue to forecast revenue growth of 18% over our five-year explicit forecast, and earnings growth of 21%. The stock is now modestly overvalued, trading at a premium to our intrinsic valuation.
