Marico - No Longer A Safe Parachute!

The story of Marico evolving is divided into phases, the first one being establishing Parachute and Saffola as consumer brands, these were previously under the consumer products division of Bombay Oil Industries (The Family Business).

About the Company:

In 1970, Harsh Mariwala, decided to convert the Parachute and Saffola business from B2B to B2C product. Previously, the Coconut Oil(Parachute) and Edible Oil(Saffola) were sold as a B2B product later on they were sold as B2C products in small packing of 100 ml instead of being sold in big containers of 15 Litres.

Marico’s Journey and change in strategies:

Timeline of Marico:

Source: Marico IP

Industry Overview: FMCG is the fourth largest sector in the Indian Economy, the size of the FMCG industry as on 2018 was 53 billion$. The FMCG sector contributes nearly 20% to the Indian GDP as on 2018.

The segments of FMCG Sector:

Source: IBEF

The main segment for Marico under the FMCG industry is the Hair Care market which contributes around 6.5% to the total FMCG sector. The Coconut Oil and Hair Oil is the major market for Marico and both these categories command 50% of the total hair care market. The company also has some presence in Hair Conditioners category.

Source: Bajaj Corp IP

Business Segments:

*The Kaya business was also the part of operations till 2013.

Indian Consumer Product Business Growth: Over the last 30 quarters, Marico’s Indian Business has shown subdued growth both in value and volume terms. The average volume growth was just 5% from Q3 2013 to Q4 2020. Given Marico’s product portfolio majority of its revenue comes from Coconut Oil which has now become a branded commodity so the demand for the product is not going to rise exponentially and it is also fully penetrated with around 70% penetration. The value growth of the business has also remained subdued in the range of 8-9% over last 30 quarters, mainly because of volatile input prices. Let’s look at the reasons why the Indian part of the business is struggling to grow. All the three major areas of company the Coconut Oil, VAHO and Saffola has struggled lately and has grown in single digits over last 7 years.

Source: Marico Company

Glimpse of Mario’s Dominance in Indian Consumer Product Business: Marico has been the leader in various products and segments and is place either 1st or 2nd in various categories, this shows how the company has been over the years focused on creating a brand in each and every category and this has yield results for the company.

Source: Marico’s Quarterly Updates

Indian Consumer Product Business: The Indian Consumer Product Business contributes 77% to the total Group’s Revenue. The Indian Business has been struggling to grow lately, the consistency and double digit which was prior to 2013, is not the case today. The sales CAGR from 2006-13 was 20% whereas the growth from 2013-20 dropped to 8% CAGR. The low single digit growth could be attributed to many reasons, like saturation of growth of Coconut oil portfolio etc. we will discuss it going forward why the FMCG giant of India is struggling to grow despite a strong foothold in the FMCG market and some decade old brands.

Source: Marico Company

Indian Consumer Product Business Segments:

Coconut Oil Business: The company has been known by its Coconut oil brand Parachute over the years, it is the largest player in Coconut oil in the world and it has a dominant market share in India. The Coconut Oil Franchisee of the business is the major source of Revenue for the company since inception. The size of the Coconut oil estimated by the management is around 5500 crores as in Nov-2019.

Branded Coconut Oil Market India: Out of the total Coconut oil market around 60-65% is sold in branded form and remaining 30-35% is still sold in unbranded form, here the company sees a huge headroom for growth. But this has not been the case over the years.

Source: Marico

*The Branded market has been around 60% over the last 7 years.

Leader in Coconut Oil:

The company has been able to maintain its leadership position in the coconut oil market and the market share has continuously increased and is currently at highest 62%.

Source: Marico

* Coconut Oil Brands are Parachute, Nihar and Oil of Malabar.

Coconut Oil Revenue Contribution: The Coconut Oil has been the major contributor over the years, the company has tried to reduce dependency on it but this has not paved the way for the company. Parachute Oil being a branded commoditized play there is no much visibility of growth, the volume growth has been in single digits and there are signs of it reducing in the term going forward.

Source: Marico’s Quarterly Updates

The growth trajectory is now muted with low single digits: The Parachute franchise has been on a muted trajectory since last 6 years in the low single digits, this could be attributable to many reasons like saturation of the coconut oil market, the loose form is not being converted into the branded form and also the raw material copra plays a huge impact on the volumes of Parachute.

Source: Marico’s Quarterly Updates

Period Q1-08 TO Q4-20:

If we have a look the average growth has been around 7% since 2008 and company has also given guidance of 5-7% growth in volumes growing forward.

Period Q1-13 TO Q4-20:

Parachute Revenue:

Revenue has grown at a CAGR of 10% over the last 8 years, so here also struggle is visible. The problem is mainly because of difficulty in volume upticks.

*In 2012, 2013 Kaya was part of Marico.

Correlation between Parachute Value Growth and Copra prices: Copra is the main raw material for Coconut Oil production and there exists a lag effect between the two. For eg:In Q1-15 the copra prices made the peak and you can see that between Q2-15 and Q3-15 the value growth was also the highest so we can here see that there is a 45 day’s lag between copra prices and the value growth (basically the price increase the company takes). So for us to forecast the value growth or the price increase the company is going to take could be ascertained by the copra prices trend.

Source: Marico Quarterly Updates

Competitively Priced: The Parachute is the most reasonably priced product available in the market and given its dominance in the Coconut Oil space, the low price acts as a stimulus for the customers to go for a more recognized brand i.e Parachute.

Outlook for Coconut Oil Category: During the last six years the coconut oil franchisee have not been delivering extraordinary growth as you can see in the highlighted part there has been instances of negative volumes growth, and the management is also expecting a 5-7% volume growth in medium term. So we cannot expect it grow more than 5-7% going forward.

Parachute – Edible Oil and not just a Hair Oil!!: The company classifies the sale from Parachute under the Edible Oil and not under Hair oil part, so everyone who would try to figure out why there is such a high sale from Edible oil when Parachute is the largest contributor. The classification is mainly because the ingredients in Parachute are same an Edible oil and there is guideline by Government wherein the sale from Edible oil enjoys zero Excise duty. The revenue mentioned under Edible oil head includes revenue both from Parachute and Saffola.

Value Added Hair Oil(VAHO):

The Value Added Hair Oil segment is the second largest contributor to the revenue after Parachute and company forayed into Value added segment way back in 1991. Marico has very effectively leveraged its expertise of building the Parachute brand in expanding the VAHO space and here also company has built some well-known brands.

In the VAHO category company is well diversified across different hair oil variants and the company is constantly trying to innovate in this segment. The other players that compete with Marico in the VAHO category are Dabur, Bajaj Corp, Emami etc. Some notable brands of the company are Hair&Care, Jasmin, Nihar Naturals, Parachute Advanced etc.

VAHO Product Portfolio: The Amla hair oil segment is the largest segment in the VAHO category with 27% share. and other categories are shares are mentioned below:

Source: Marico IP

Example of How Marico created a brand in VAHO segment: Currently the top performing brand in the VAHO segment is Nihar Shanti Badam Amla. So, Nihar is in direct competition with Dabur Amla and is leader in the segment with 41% market share in Volume terms. In the table given below we can see that how company has been able to gain a significant market despite Dabur dominating in 2010 with 80% share and during 2010-2019 Nihar share has increased from 9% to 37%.

*The above data is Value market share

Value Added Hair Oil Market: The Overall VAHO category has grown at a CAGR of 13 % over last 10 years.

*Market size as on 2019, the above mentioned data of 8100 cr is not taken because of calculation purpose.

Leadership in the VAHO segment:

The company just like the Coconut oil has dominated in the VAHO industry. The market share of the company has continuously increased since 2008 and is now the largest player in Volume terms.

Source: Marico Quarterly Updates.

VAHO Revenue Contribution: The VAHO category is the second largest contributor to the company’s India business and VAHO portfolio also helps in enhancing the margins for the company because it is directed more towards the specialsed segment and to a specific problem. The contribution has increased from 20% in 2012 to 24%, there has been fluctuating contribution from this category mainly because of the very tough competition from other companies in the specialized segment.

Source: Marico Quarterly Updates.

VAHO Segment Revenue: The Y-O-Y sales growth in the VAHO segment has continued to drop down and the average growth rate has been 10%. The muted performance in the sales growth is mainly due to the category being very fragmented and there is intense competition from players like Dabur, Bajaj Corp, Emami etc.

VAHO Segment Volume Growth:

One thing common in both the Parachute as well as VAHO segment is that the previous high volume numbers are not repeated. For e.g. after Q4-13 the company has grown at a maximum rate of 15% while previously the growth used to be well above 20%. So, we can expect going forward the 10-12% growth rate could be the new normal for the company unless the company gives out any guidance or does any product innovation which could drive the sales growth for the VAHO category.

Source: Marico Quarterly Update.

VAHO Segment Value Growth:

The value growth in the VAHO segment is also on the declining trend and since last 18 quarters is growing in low single digits which is completely contrary to the years in 2013-2016 where the growth has been in the high double digits indicating a trend that company is no longer able to increase the price of its products and sell it to the customers, which could be attributable to many reasons like lack of innovation, saturation of product portfolio and emergence of many organic and herbal players.

Source: Marico Quarterly Update.

Product Pricing Against its peers:The products in the VAHO category compete with products of other brands, for e.g. in Amla Oil Dabur is the leader and Nihar is competitively priced against Dabur.

*The prices are for different SKU’S.

Outlook for VAHO category: The VAHO category which previously was regarded as the margin driver for the company is not the case now because we can see that the Value growth has been continuously on a declining trend, which indicates that company is not able to raise its price and sell and similarly the volume growth is also declining continuously delivering a low single digit growth. Going forward the VAHO category is expected to deliver the subdued Volume and Value growth, unless the company doesn’t bring something extraordinary on table for its customers.

Saffola: The company classifies Saffola into the Super Premium Refined Edible Oil, the main target being the high end retail customers and not meant for the masses. The Saffola brand has been able to maintain its identity as a healthy oil good for Heart and for people with cholesterol. Over the years the Saffola has been sold through this message and company has created a niche for itself in this category.

The Product Portfolio Under Saffola Brand includes: • Saffola Edible Oil • Saffola Oats • Saffola Fittify Gourmet

Saffola Edible Oil Variants: • Saffola Active • Saffola Tasty • Saffola Gold • Saffola Total

Saffola Edible Oil Leadership: Over the years Saffola edible oil franchise has been able to maintain its leadership in the super premium refined edible oil segment. Currently the company commands 76% of the category in volume terms in the super premium refined edible oil. If we try to find a peer for the company the companies that could be comparable are Adani Wilmar(Fortune), Agrotech (Sundrop).

*Share in Super Premium Refined Edible Oil.

Saffola Oil Revenue Contribution: The Saffola Brand has been one of the major contributors to the company’s India Business. The contribution from this category has decreased over a period because of below par performance from the brand. The main reason why Saffola has de-grown is because of high price differential between its products and other edible oil available in the market.

Source: Marico Quarterly Update.

Saffola Segment Revenue: The Saffola Oil segment has delivering a sales CAGR of just 8% over the last 8 years which is lower than the Indian Consumer Product Business of 9.5%. So, we can see that the Saffola Oil Franchisee has not been upto the mark and also the problems it is facing because of its high premiumisation over the other edible oils. The uptick at the consumer end is seeing a muted trend although the company is giving offers continously still it is struggling to pickup and increase its sales.

Source: Marico Quarterly Update.

Saffola Oil Volume Growth: The volume uptick in Saffola Oil has struggled post 2012, as it is visible from the trend the growth after 2012 has been very fluctuating, this can be attributed to raw materials costing and also the huge price competition form the companies like Fortune, Sundrop and other healthy edible oil alternatives like Oilve oil atc. So we could anticipate a volume growth would revert to the mean and shall remain in that range in the medium term.

Source: Marico Quarterly Update.

Saffola Oil Value Growth:

Saffola Oil Value growth has been below par over the last 7 years and company is continuously trying to revive the Saffola brand. The below chart indicates that the company is not able to grow with price increases, i.e if the company increases the prices of its products then it does not have the power to retain its customers, because of huge price differential between its products and other edible oil.

Products Pricing:  There is no exact comparison to the products, but below mentioned brands are all in the premium refined oil category. Saffola has different variants catering to different geographies and different problems. For e.g. Saffola Total is for someone who is looking for a Healthy Heart, Saffola Gold is for the Healthy Lifestyle etc.

Saffola healthy Foods Segment: The healthy foods segment includes Oats, Value added Oats (Masala Oats), Saffola Perfect Nastha. The major segment is the Oats segment and company has been successful in maintaining its leadership in this segment. In the Masala oats segment company was the first mover and continuously brought new flavors and developed a healthy and tasty combination for the customers.

The Healthy Foods Segment Includes: • Saffola Oats • Saffola Fittify Gourmet • Coco Soul

Saffola Oats: The company entered into the Saffola Oats category in 2010 under the Perfect Nastha theme since then if we look at the Value market share for the company has continuously grown, the main area where Saffola has been successful is in the Masala oats category and the company has around 71% market value share in this category. The use if brand Saffola now carries an impression of offering healthy stuff, because it is continuously portrayed as a healthy brand from the start. The company competes with Quaker, Kellogg’s in the Oats category.

The Male Grooming Segment: Marico acquired the personal care brands of Paras Pharma from Reckitt Benckiser in 2012, Marico now owns brands such as Set Wets, Livon, Zatak and some other personal care brands. The product portfolio under Male grooming segment includes Hair Gels/Creams and Deodorants. The company claims to have 60% market value share in Hair Gels/ Creams segment. The Male Grooming segment contributes around 3% to India Business Revenue.

Premium Hair Nourishment: The Hair Nourishment includes brands like Livon and Hair&Care, the Livon brand was acquired from Paras Pharma in 2012 and it now contributes around 1% to India Business Revenue.

Outlook for Saffola Oil: The continuously struggling Saffola category, cannot be ignored because company has not been able to revive growth in this category since last 7 years, so we can’t expect consistent high growth in the medium term, because there is no change in strategy by the company as of now.

International Business: In 1991, the first manufacturing was established outside India, in Bangladesh since then company has continuously started to expand its operations in different countries like Vietnam, South Africa, MENA countries etc. The major contribution comes from Bangladesh around 49% of the International Business. In all the countries company has established brands which are market leader in the segment which it operates.

Dominance in International Markets:

Source: Marico Quarterly Update.

International Revenue Breakup:

Source: Marico Company.

International Product Portfolio: The company is strongly using its Indian Business expertise in building brands outside India, the demographics in Bangladesh are very much similar to Indian demographics so the brands established in India can be used and directly tested in the Bangladesh. In other geographies company has adopted an inorganic way of growth. The company has not laid down any plans of expanding into different territories apart from the existing ones.

International Business Contribution:

The contribution from the International Business has been largely stable over the last 10 years in the range of 22-24%, after 2004 company started exploring new territories and gradually increased the International Business proportion mainly through acquisitions in many countries. The share from International Business is expected to stay in the current range, there are no plans the management as of now to expand the pie of International Business.

Source: Marico Company

International Business Revenue:

Initially International grew at a brisk pace i.e between 2006-13 the sales CAGR was 35%, but after 2013 the growth was disappointing the average Y-O-Y sales growth was in low single digits, indicating muted volume growth because given the company’s products, each and every product growth is supported by volume only, so this is also a worrying sign for the company and if investors are expecting there could be some optionality from international business then this could not be the case unless the company expands into some other territories or reshape its product portfolio.

Outlook for International Business: Company’s International Business is also poised in a stagnant territory with a muted growth every year. The margins are intact but there is no clarity on the revenue growth part, because every country in which Marico operates it has almost captured the category, and any new territorial is not on cards as of now.

Trade Bifurcation: The company has been continuously trying to exploit the Rural markets, because there is huge headroom for growth and given the product portfolio of Marico it is best suited to grab the rural share. But main problem is down trading in the rural market which hampers the growth for the company. In the Modern trade company has increased presence gradually, E-Com now forms 4% of the total Indian Sales which is going to increase going forward. The presence in CSD (Canteen Stores Department) the largest retailer in India has remained in the same range.

Source: Marico IP.

IT & ANALYTICS: The company has in place best IT softwares for inventory management. It has adopted SAP M11 for making manufacturing more competitive and efficient. Arrangements with ISRO for a analytics software that would keep a eye on thw whole distribution chain.

Complete change in Strategy: Marico adopted an inorganic way of expanding prior to 2013, it was continuously acquiring brands in both India as well as International Markets. The major acquisitions were Nihar, Set Wet and Livon. Apart from that all the acquisitions have been in the international markets. The most recent acquisitions were in startups in 2018 like Beardo, Isoplus and Revofit, these all were not a major acquisition. Since 2013 the company’s strategy has shown that It is not finding any new ventures where it could invest and explore the synergies. The management is also nor giving guidance about future prospects.

Demerger of Kaya: The KAYA venture was not being profitable since 2003, so the management decided to demerge from the existing business in 2013, as it was hindering the profitability of the group as a whole. The KAYA venture was then listed separately.

Financial Statement Analysis:

Marico Group Revenue: The revenue of the group as a whole has grown at a CAGR of 15% for last 16 years. But as mentioned previously about how the company is not able to grow, after 2013 as it is visible from the growth, the average growth was just 7% between 2013-20, so we cannot expect the company to deliver much higher growth going forward, because the company has not laid down any such measures or new product launches which could the boost the growth going forward.

Raw Material Cost:One of the major costs for the company is raw materials (mainly comprises of copra). If we see the trend for COGS as a % of sales it has largely remained around 53%, which shows how the company is able to manage the gross margins and fluctuations from copra prices. The management of raw materials becomes very important for the company to maintain its operating margins.

The below chart shows how the copra prices affects the Parachute Gross margin: Whenever the Copra prices peak out the gross margins for Parachute hits a bottom and vice-versa, but the company has been successful in managing the copra inventory in such a way that it operates in a given range of gross margins which could be seen from the chart of COGS, where the proportion is constant at around 51-53%.

Source: Prabhudas Liladhar Report

Other Major Costs: Employee Cost and Advertisement Cost forms a major part of the total costs. There has been reduction in the Advt cost from 13% to 10% because management was not finding any additional value addition of 13% cost so they gradually reduced it. The current Advertisement and Employee cost % is to remain and we cannot expect it to decrease going forward.

Operating Profit Consistency: The EBITDA has grown consistently, it has not followed the sales growth trajectory like in 2013-20 the average EBITDA growth was around 16% whereas the sales growth was just 8%, so this in some ways signifies operating efficiency, but this is attributable to other factors like reduction in Advertisement and Sales promotion expense down from 13% to 10%.

Net Profit Consistency: As seen in the EBITDA trend the net profit is constantly growing is double digits owing to some cost cutting measures undertaken by the company. The PAT has grown at a CAGR of 20% over the last 16 years, this is a great feat. But going forward even if the PAT is able to grow in double digits but in near future because of low growth in sales the numbers would not monetize.

Margin Profile: The margins are at present in the highest range over the last 15 years, this indicates how company has gained control over its costs and managed it very efficiently. The EBITDA margin guidance given by the company is 18-19% so in near term the margins are going to sustain.

Working Capital Management:

Marico requires very small amount of working capital to run its business The working capital management done by company is very efficient, the amount stuck in Working capital is just 7% of sales over the year. This implies that the company does not require huge cash for its day to operations. Inventory days are largely stable after 2013, implying efficient inventory management, and company also commands a good credibility from its suppliers which can be seen from the payable days the continuous rise in the payable days. Given the business model of the company, it is not at any point required to sell on credit, only a small proportion of goods are sold on credit. The cash conversion cycle for the company is as low 60 days i.e within 2 months’ company gets it money back.

Return Ratios:

The company has been constantly generating ROCE greater than the cost of capital consistently over the last 16 years. This implies the brand image the company has enjoyed over the years and the reason why investors have made loads of wealth by buying this stock. Such consistency in return ratios over a long span implies the efficiency with which the company is able to run its business.

Consistency in Free Cash Flow:

In the initial 10 years from 2004 to 2013 the company Free Cash Flow was less, because the company was trying to get its strategy right. In 2006 company acquired Nihar from HUL so because of this there is negative Free Cash flow and between 2010 to 2013 company was on a buying spree i.e it was continuously acquiring both in India and outside India. In 2013 it acquired Paras pharma brands. The FCF/PAT ratio is very high indicating the company’s efficiency and it also states how much portion of PAT is actually available Free for the company. The FCF/PAT is also on an average around 75% which is a strong sign. Now, what’s the scenario after 2013 is company is constantly generating Free cash because it has no more avenues to grow and company is taking decisions very cautiously and until it finds any good opportunity it is distributing the cash in the form of dividends. We can expect the company to keep on generating sufficient Free Cash.

Source: Marico Annual Report

Capital Allocation: The Fund Allocation by Marico is the same like a company in a mature phase, which has no more avenues for growth. The company meets all its requirements internally through CFO and majorly distributes the funds in the form of dividends, the mast significant capex done by the company was way back in 2013, apart from that all the cash is distributed to shareholders. The company is also not misallocating capital.

Dividend Payout: Marico has been consistent in rewarding its shareholders, the company pays on an average Rs. 6 dividends to the shareholders every year and it is going to continue going forward, it might increase as well. The long term target of the company is to maintain Payout Ratio of 70-75%. If we calculate the dividend yield of Marico with CMP as on 15thMay was 308. The dividend yield comes out as almost 2%.

Peer Analysis:

As, Marico is diversified into various businesses there is no perfect peer. I have compared on the basis of segments. In Hair oil category the other major players are Dabur, Bajaj corp both these players are majorly into VAHO category. Dabur major revenue comes from Amla based oils whereas for Bajaj Corp it comes from Almond based Oils. In the table below it is clear that Marico is the best performer in the Hair Care market among its peers mainly because of its leadership in the Coconut Oil segment. But if we look at the overall Industry this is not an attractive industry anymore given its stagnancy in growth.

In the edible Oil category, company operates in a totally different segment of Super Premium Refined Edible Oil, so I could not find an exact peer in this category. The major players in the edible oil premium category in India are Adani Wilmar (Fortune Brand), Agrotech Foods(Sundrop). I have compared Saffola and Adani Wilmar.

Current Valuation of Other FMCG Companies:

Management: The whole company is managed professionally there is no family member involved in daily operations. Each and every person is vastly experienced in a special field and also one most important thing majority of the personnel are associated with the company with more than 10 years.

• Saugata Gupta(MD&CEO): Saugata joined Marico in 2004 as head of marketing, later in 2007 he was elevated to become CEO of India Business. In 2014, he was promoted to the post of MD&CEO of the whole group. Prior to joining Marico, he has worked with Mondelez and ICICI Prudential.

• Vivek Karve (CFO): Vivek is CA and a Cost Accountant, he is associated with Marico since 2000. He has played an active role in Marico’s M&A efforts over the years. Vivek took over the charge as CFO in 2014. He has previously worked with Siemens, P&G, ICICI.

• Jitendra Mahajan (COO- Supply Chain &IT): Currently heads the Procurement and Operations of Marico. He is responsible for manufacturing and supply chain for Marico India.

• Koshy George(CM0): Koshy is currently the Chief Marketing Officer(CMO), he brings with him more than 17 years of work experience in sales across categories like personal care, home care etc. He has worked with HUL from 2006-10 and served on leadership in its personal care portfolio.

• Gaurav Mediratta (COO –International Business(MENA)): Gaurav joined Marico in 2018 as Executive VP. Prior to joining Marico, he has worked with Colgate Palmolive for 12 years and 7 years with HUL.

Board of Directors:

The Independent Directors on the board presents a strong face for the company, people of the likes of KBS Anand strengthens the board. The BOD is composed if people from diverse fields providing their expertise.

• Harsh Mariwala (Chairman): The main face behind Marico and making it the one of the most successful FMCG company. He stepped down as MD in 2014 and gave reins to Saugata Gupta. He currently sits on the board but does not participate in daily operations.

• KBS Anand (MD&CEO Asian Paints)

• Ananth Narayan (CEO Myntra & Jabong)

• B.S Nagesh (Vice Chairman Shoppers Stop)

• Sanjay Dube (CEO R. Retail Ventures)

Shareholding Pattern:

The stake of promoters has remained stable over the recent 10 years, there is no pledge by the promoters. The major institutional investors are Arisaig Partners, Morgan Stanley Investment Managers, Black Rock, LIC etc.

Current Valuation: The Average P/E over the last 10 years has been 37, and the company is currently trading at 29 multiple as on 31st March 2020, the share price performance has remained stagnant over the period of 2016-20, which shows how company is in a mature phase and the market already knows about the growth prospects there are no surprises, everything is priced in.

Summary of the whole Analysis:

Positives about Marico • Strong foothold in Hair Care Market with a strong portfolio of brands and products. • Majority of Brands are the market leader ranking either 1st or 2nd in the respective market. • Consistent generation of ROCE and ROE Greater than the cost of capital over last 15 years. • Consistent Free Cash flow generation along with establishing operating efficiencies. • Despite Revenue growth slowing down company has been able to hit high margins signifying operational efficiency. • Minimal Working Capital requirement just 7% sales Is required to run its day to day operations. • The company neither diluted equity, and is currently Debt free and plans to remain so. • Despite generating enough Free cash, the company has not diversified into unrelated territories instead distributed dividends. • Benefit of existing brands could lead to cross selling opportunity.

Concerns: • The conversion of 30-35% of unbranded Coconut Oil is not happening since last 7 years, but the company is every time claiming to grab the unorganized share but this has not happened. • Saturation of Existing Product Portfolio has also somehow started; this is evitable from the decline in growth of the major products. • The industry itself is not growing, because of saturation in every category like Coconut oil, Hair oils. • The penetration of Hair Oil stands at 93%, so the headroom for growth is very minimal because of the industry. • The Hair Oil products which Marico produces have more or less become staple products, every market is penetrated and rural market is generally price sensitive so any price increase results in down trading. • The growth outlook in the Saffola Business is in single digits because of high premium to other brands, people shifting towards healthy lifestyle. • The new CEO has not been able to turnaround the fortunes for the company, for e.g. the new CEO was appointed in 2014, so as stated the growth after 2014 has been on a muted trajectory. • Need new avenues to support next leg of growth.

Outlook for Marico: After completing the whole analysis, the major problem I think is on the growth part the volume trajectory is in the single digits and it is not evitable from the current prospects of the management about the new strategy to growth, I think the most important for investors is they want a company which could grow at high terminal growth, the terminal growth for Marico would remain in low single digits because the management has seemed comfortable in the current situation. The management previously adopted a premiumisation approach BUT IN Q4 2020, management has given guidance the focus is now shifted to core categories and nor premiumisation. Company has shown confidence in new categories like Saffola Fittify, Coco Soul but it has not yet yielded results and this category is already very fragmented. If the growth problem remains for the company, then the Return Ratios would falter going forward and there is a risk of capital misallocation if the company has no idea of where the free cash should be deployed.

We could see Marico as a business which could continue delivering a constant single digit growth, but there will be some visibility so this could be a bet where our Capital could be preserved and there is certain safety, and with the current valuations where the dividend yield is also 2%, so this also could be another view if we are chasing some mature business.

Disclaimer: This post was originally written by Aman Madrecha on his website and has been reproduced here (with certain minor edits) with his kind permission. Also note that this post should not be construed as investment advice from Galactic Advisors.