February 27: Notwithstanding a brace of negative news, analysts are bullish on Marico Industries Ltd. Although the company is recording growth in all product categories (both in terms of volume and value), the stock has been underperforming the BSE-Sensex over the past several months following some news like the Income Tax raid on the company and the merger proposal with group company Kanmur Foods (KFL). While Kotak Securities has revised the company's earnings estimates upwards, Lloyds Securities has given the scrip an `outperformer' rating.According to Lloyds, the scrip was a market performer between May 1996 and August 1997 - appreciating by more than 50 per cent compared with 30 per cent by the Sensex. However, affected by the tax raids on the company, the scrip declined by 36 per cent over the last five months, compared to 12 per cent by the Sensex. Also, the company's decision to merge KFL (its subsidiary and a BIFR case) with itself has been a bone of contention for its minority shareholders and ispartly responsible for the scrip's decline on the bourse, says the report. However, both the reports say that the market has been too harsh on the stock and deserves a better valuation on the strength of its future prospects and brands.
According to Lloyds, 18 per cent CAGR in sales (fiscal 1997-2000), higher operating margins and strong earnings growth of 28 per cent will drive the stock in future. At a price earnings ratio of 0.45, the stock is trading at 10 per cent discount to the market and at 60 per cent discount to the FMCG sector. Marico has been generating economic profits during the past four years, and with improving ROCE, it is in a position to generate higher economic value added in future, the report adds. Currently, the scrip is among the least expensive in the sector. Marico dominates the coconut oil market with Parachute and the refined edible oil market with Saffola and Sweekar. The company's brands command high market share. Renewed focus on leveraging the equity of Parachute by creatingmore brand extensions, combined with greater penetration in non-urban areas could ensure good growth, according to Lloyds.
However, the Lloyds report also spells out a number of risk factors associated with the scrip. Being a strong FMCG company, Marico is more vulnerable to fluctuations in raw material prices which can affect margins. Its excessive dependence on three strong brands, two of which are not even owned by the company, increases risk profile. Also with a high beta of 1.2, the scrip is more risky than the market.
(Compiled from reports by Kotak Securities and Lloyds Securities)HoweŽ
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