February 10: A case of drastic market revaluation has unfolded at the Marico Industries' counter. Hopes of a bonus issue were so heavily built into the stock price that fears that the issue will not be forthcoming soon led to a fall in the share price. In recent months, the scrip has fallen by 37 per cent to Rs 220.Even otherwise, the market has been valuing companies like Marico which earn a hefty return on capital very well, and at a price-to-earnings (p/e) which is consistently above the average market multiples, currently at 12 times its historic earnings, the stock is very much within the premium bracket reserved for the more respected and highly-rated Indian companies.
The company, which sells commodity products under some of the strongest brandnames in the country, made its initial public offer (IPO) in March, 1996, under poor stock market conditions. Still, the issue, which was priced at 10 times earnings, was oversubscribed. It represents the market's long-term view on the company and isdiscounted in the same league as companies like MRF, the TVS group of companies, Telco, Tata Chemicals and others like it. At its peak price of Rs 350 late last year, the earnings multiple was 19 times (reflecting the unreasonable premium on bonus expectations).
Marico's profits are sensitive to the price of its main raw material; coconut oil. Of late, there has been a lot of volatility in domestic prices of coconut oil, with prices fluctuating in a band of 5-7 per cent. The company has to deal with this kind of volatility every single year. Last year, the prices fluctuated between 7 and 26 per cent (Jan-December 1997), and in the previous year, (Jan-December 1996), the price of coconut oil fluctuated between 10 and 61 per cent. Just as in the case of natural rubber, the domestic prices of coconut oil are much higher than international prices and a strong farmer lobby has so far prevented the import of the same from being allowed freely, leading to a volatility. This has had a bearing on Marico's financialperformance for, though last year's revenues grew by 17.5 per cent, margins could not be maintained.
Further, despite a growth of 21 per cent in revenues in the first half of the current year (1997-98), margins fell slightly when compared to the first half of 1996-97. The stock fell almost immediately on announcement of the half-yearly results. These results were undoubtedly fully discounted at the time of the announcement and so were the expectations for the full year, but fears over the bonus issue being delayed further dampened sentiment at the counter.
But bonus or no bonus, the stock's peak price of Rs 350 was most certainly at a large premium to its underlying value, and exactly the opposite is true currently. At the current price what is not being adequately valued is the fact that Marico's financial performance has been very consistent in the past as seen in its ability to repeatedly beat its cost of capital and earn consistently high returns, which is a far more important parameter. The peakperformance was seen in 1996-97 when return on capital was 28 per cent against 26 per cent in the previous year. This year, too, there seems to be a reduction in capital employed which should push up the return on capital some more.
The only point that can be held against Marico's valuations is that though it manufactures and sells under well-known brands like Parachute, Saffola, Revive (which is a popular fabric starching agent) and Sil (fruit jams), it does not own the two main brands of Parachute and Saffola which generate three-quarters of the annual revenues of the company, instead a privately held company called Bombay Oil Industries Ltd owns the brands which are licenced out to Marico Industries. The same is true for its brand Sil which is owned by another Mariwala family-run concern, Kanmoor Foods Ltd. Only Sweekar (a refined oil) and Revive are owned by Marico, but growth in the fabric starch market is difficult to estimate as it is relatively untapped.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
