Marico: Narrow moat intact as growth in hair oils picks up

Management shared that it is looking to double Marico’s top line over four years, or 19% compounded annual growth rate, ahead of our 16.7% average forecasted growth.
By Suruchi Jain |  06-08-14 | 
 
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Suruchi Jain is an equity research analyst on Morningstar's India team, based in Mumbai. She covers consumer, banking and pharmaceutical stocks listed in India.

Marico's first-quarter fiscal 2015 consolidated revenues grew by 25% and earnings rose by 19%, after adjusting for the Kaya spin-off. Its India business grew by 28% (6.5% in volume terms) ahead of its international business which grew by 16% (9.6% in constant currency terms), as the firm reaps the benefits of many new product launches undertaken over the last two years, as well as the expanded distribution reach into the rural parts of India and to urban retailers in the top six metropolitan cities of India. Similar to other consumer product firms, we believe rural reach will be important for the future growth of the company. Management guided that they anticipate rural sales to account for 35% of the firm’s India sales, versus a little over 30% at present.

What we found encouraging in this quarter’s results was that Marico’s flagship hair oil brand Parachute witnessed a pickup in sales volumes to 6%, compared to 4% in the same quarter last year. This was despite the company continually passing on its higher input costs (due to rising copra oil prices) in the form of higher prices to consumers. Over the last twelve months, the firm has increased prices by 33% on a weighted average basis across its Parachute and Nihar brands and yet continues to grow volumes. This speaks to the firm’s pricing power in its largest product category of hair oils, substantiating our narrow economic moat rating on the firm.

For the first time, management also shared that it is looking to double Marico’s top line over four years, or 19% compounded annual growth rate, which is ahead of our 16.7% average forecasted growth. We anticipate that this incremental growth will come from acquisitions in the company’s India consumer portfolio (outside of hair oils). As we roll our model forward to take fiscal 2014 results into account and build some acquisitions in the later part of our five year forecast, we anticipate taking up our fair value of INR 204 on the stock by a little over 5%, shortly.

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