Note this: Rs.100 invested in Marico at the time of its IPO in April 1996 would have turned Rs.9,314 by March 2015. Marico claims that it is a market leader in 90% of its current portfolio of products. Its operating margins have steadily improved during the last decade. Return on capital is impressive, and Marico does not carry much debt. Of course, it has been one amazing story of growth. It has expanded both organically, and through acquisitions.
Revenues grew over 18% since 2005, and earnings per share over 22%. Equity dilution, if there was any, does not seem like it was there. Significant portion of growth has been due to the pricing power, rather than volume-driven growth. Marico's aggregate free cash flows to firm from 2005-2015 is Rs.1.43 b. Excess returns are clearly visible. But then again, we have to ask whether Marico will be able to stretch its competitive advantages period for long. The longer it stretches, the longer it will take to become a mature firm.
So, what's in there now? The chairman gives 5-pointers: Innovation, Go-to-market (for higher penetration) Transformation, Value Management, Talent Value Proposition and IT & Analytics. The company has the medium term volume growth target of 8-10% which is of course much higher than the recent past. It expects overall growth to be approximately 15% in the medium term.
Outside of India, Marico has a significant presence in Bangladesh, South East Asia (Vietnam, Myanmar), the Middle East, Egypt and South Africa; and a revenue share of about 22%. Bangladesh is the single largest market for Marico outside of India with 45% (international) revenues. It is surprising to note that although 18% of international revenues come from the Middle East and Africa, the business has still not achieved profitability; the managers say, it will come. In India, revenues from the rural areas account for 33%.
As reported by the managers: Parachute is a Rs.15 b revenues brand now. Parachute and Nihar jointly have a market share of 57%. In the premium refined edible oil segment, Saffola has a market share of 58%; and in the Oats segment, Saffola has a market share of over 20%. Set Wet gels and Livon serums have been growing.
The CEO has received 346,600 stock options at an exercise price Rs.1 per option which have vesting period of 2 years. At the current price it amounts to Rs.147.30 m. The company also operates stock appreciation rights scheme for eligible employees which has 1.99 m grants outstanding with the grant price of Rs.208.96. The information in the annual report lacks details regarding how they are converted into shares issued to employees, if they do, etc. It is also not clear whether there will be any dilution in equity in the coming years because there is also a mention of employees getting cash representing difference between maturity price and grant price. Nothing is mentioned about maturity details. May be there is no dilution here as it is mentioned that a trust is formed for operating this scheme which will purchase shares through funds advanced by Marico, and then at the maturity date it will sell those shares and give the proceeds back to Marico. Nevertheless, the managers could have been a little more clear about the scheme.
None of the independent directors hold any shares in the company. As it is in other companies, key management personnel are happy increasing their holding only through stock options granted to them, and will probably look at market optimism while offloading them.
That's the story so far; how about the value of the business? I usually look at free cash flows to firm for estimating value. As noted, these have been phenomenal in the past. I have tried to estimate future cash flows based on revenues, margins, and reinvestment during high-growth period, and then cash flows based on the characteristics of a stable business. As usual, I arrive at a value that is far lower than the market price.
The current market price is at historical high levels, and I have no intention of buying the market's assumptions in pricing the equity.
Outside of India, Marico has a significant presence in Bangladesh, South East Asia (Vietnam, Myanmar), the Middle East, Egypt and South Africa; and a revenue share of about 22%. Bangladesh is the single largest market for Marico outside of India with 45% (international) revenues. It is surprising to note that although 18% of international revenues come from the Middle East and Africa, the business has still not achieved profitability; the managers say, it will come. In India, revenues from the rural areas account for 33%.
As reported by the managers: Parachute is a Rs.15 b revenues brand now. Parachute and Nihar jointly have a market share of 57%. In the premium refined edible oil segment, Saffola has a market share of 58%; and in the Oats segment, Saffola has a market share of over 20%. Set Wet gels and Livon serums have been growing.
The CEO has received 346,600 stock options at an exercise price Rs.1 per option which have vesting period of 2 years. At the current price it amounts to Rs.147.30 m. The company also operates stock appreciation rights scheme for eligible employees which has 1.99 m grants outstanding with the grant price of Rs.208.96. The information in the annual report lacks details regarding how they are converted into shares issued to employees, if they do, etc. It is also not clear whether there will be any dilution in equity in the coming years because there is also a mention of employees getting cash representing difference between maturity price and grant price. Nothing is mentioned about maturity details. May be there is no dilution here as it is mentioned that a trust is formed for operating this scheme which will purchase shares through funds advanced by Marico, and then at the maturity date it will sell those shares and give the proceeds back to Marico. Nevertheless, the managers could have been a little more clear about the scheme.
None of the independent directors hold any shares in the company. As it is in other companies, key management personnel are happy increasing their holding only through stock options granted to them, and will probably look at market optimism while offloading them.
That's the story so far; how about the value of the business? I usually look at free cash flows to firm for estimating value. As noted, these have been phenomenal in the past. I have tried to estimate future cash flows based on revenues, margins, and reinvestment during high-growth period, and then cash flows based on the characteristics of a stable business. As usual, I arrive at a value that is far lower than the market price.
The current market price is at historical high levels, and I have no intention of buying the market's assumptions in pricing the equity.
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