Aryan Kuhad

2020A1PS1977G

Marico Business Analysis

Marico Limited is an Indian multinational consumer goods company providing consumer products
and services in the areas of health, beauty and wellness. CMP on 29-11-22 was Rs 501.50.

Qualitative Analysis :-
1. Industry Analysis (using Porter's Five Forces) : Fast-moving consumer goods (FMCG)
sector is India’s fourth-largest sector and has been expanding at a healthy rate over the
years. With household and personal care accounting for 50% of FMCG sales in India, the
industry is an important contributor to India’s GDP.
(a) Threat of New Entrants : Low
● The FMCG Sector requires huge capital investments in order to be competitive.
● There are already well established companies with big brand names, thus it requires
intensive brand campaigns to be undertaken.
● Distribution networks have to be set up, which are already occupied by big players.
(b) Bargaining Power of Buyers : High
● Low switching costs is a big feature of the FMCG industry, due to intense marketing
campaigns run by competitors which induces buyers to switch between products.
● There are many overlapping common products for buyers to choose from, which causes an
increase in the bargaining power of buyers.
(c) Bargaining Power of Suppliers : Low
● Suppliers are usually at the mercy of the reception of consumers in both domestic and
international markets.
● There are a lot of suppliers available for the same product, thus the suppliers cannot set
prices as they want.
(d) Threat of Substitutes : High
● The products in the FMCG sector are very similar in utility and need, thus any product can
easily be substituted for a product of a different company.
● Since the goods are essential goods, the demand is quite elastic. Frequent price wars occur
between companies trying to gain market share, which increases product substitution.
(e) Competitive Rivalry : High
● There has been an increase in the number of MNCs entering the Indian FMCG market. This
has caused the market to become segmented, and increased competition.
● Increased spending on marketing by companies via new media channels like social media.
 2. Competitive Strategy Analysis :
(a) Differentiation Strategy :
● For decades, Marico has focused on niche categories. Their strategy of launching
differentiated products into markets where there was no real competition has paid off
handsomely, with hair-oil brand Parachute and edible oil brand Saffola being leaders for over
20 years.
● Marico made it a point to insulate themselves from foreign Multinational Corporations by
carefully picking their portfolio of products.
● Parachute has created an identity for itself amongst every Indian household, shrugging off
competition from other brands like Dabur and Amway.
● The biggest reason why Parachute differentiated itself from other products was the
innovative and efficient packaging it introduced in the hair oil market.
● Saffola is another brand which was focused on the edible oil market, much before other
brands like Fortune came into the market.
(b) Cost Leadership Strategy :
● Marico uses economies of scale to produce Parachute, which reduces the per unit cost of
production. Considering the brand value of Parachute and it being a market leader in the
hair-oil segment, the cost is significantly reduced with higher profits coming in.
● Mairco has increased its usage of AI and analytics to drive up sales and reduce costs
especially to service rural markets. Enabling the use of tech and undergoing a digital
transformation has helped it to drive towards cost leadership.
● Marico has launched an initiative called the Marico Value Enhancement (MarVaI)
Programme which continues to drive organization wide efficiency initiatives across
geographies and functions.

3. Corporate Strategy Analysis :

● Marico has expanded rapidly into countries like Egypt, Bangladesh and Vietnam which have
low per capita income but are steadily growing and have huge potential. It has a market
presence in over 25 countries across the world.
● Marico occupies a 23% share of the international FMCG market due to this strategy of
diversifying into developing nations.
● Their focus has been on getting maximum success in differentiated products, unlike other
competitors that have focused on diversifying their product portfolio excessively, and take
part in price wars.
● Marico caters to a consumer base of all ages, as they have introduced brands like SetWet
which have been an instant hit with the younger generations. Combined with brands like
Parachute which cater to every age group, Marico has created a solid portfolio.
● Marico set the industry standard when they brought about the innovation with regards to
packaging of hair oil and edible oil.

BCG Matrix for Marico Brands

Star : Parachute, Saffola Question Mark : Travel Protect, Hair & Care

Cash Cow : SetWet, Livon Dog : Mediker

Quantitative Analysis :-
1. ROE Calculation :
ROE helps in identifying a firm’s profitability and how efficient it is in generating those profits.
The higher the ROE, the better the firm is at converting its equity financing into profits.

● First, we will compute the Return on Equity (ROE) using the figures obtained from the
consolidated annual report of Marico for FY22. Net Income and Shareholders’ Equity was
used in this calculation, where ROE = Net Income/Shareholders’ Equity

2. ROE Decomposition (Traditional) :

● Next, the traditional ROE decomposition method was used, to find out ROE using Return on
Sales (ROS), Asset Turnover Ratio and Financial Leverage.
ROE = ROS x Asset Turnover Ratio x Financial Leverage

(a) ROS = Net Income/Gross Sales = 13.19%.

Return on Sales is a measure of how efficiently a company turns sales into profits. Having a
positive Return on Sales for any company is very important with a ROS between 5% and
10% considered healthy. Marico is exceeding that with ROS = 13.19%.
 (b) Asset Turnover Ratio = Gross Sales/Average Total Assets = 168.41%
Here, Average Total Assets = (Total Assets (2022) + Total Assets (2021)) / 2
Asset Turnover Ratio indicates how efficient a company is in utilizing its investments in
assets. Marico has managed to keep this ratio over 1.5, which is considered healthy in the
FMCG industry. Asset Turnover is a very important ratio for FMCG companies as the main
principle behind this industry is that goods must move off shelves fast, and if this principle is
violated via a low asset turnover ratio, then there is something wrong in the operations of the
company. For every Rs 1 worth of asset, Marico is managing to generate sales worth Rs
1.68.

(c) Financial Leverage = Average Total Assets/ Average Shareholders’ Equity = 169.53%
Here, Average Shareholders’ Equity =
(Shareholders’ Equity (2022) + Shareholders Equity (2021))/ 2
Financial Leverage, in simple terms, is the use of debt to buy more assets. The main motive
of a company to use Financial Leverage is to increase the returns available to ordinary
shareholders. Marico has a positive Financial Leverage, which means that its borrowing
costs are lower than the overall return produced by its cash flow. This is a very good sign,
especially in the context that Marico operates in the FMCG industry.

Peer Comparison of ROE

We will compare the ROE calculated for Marico with the ROE calculated for another FMCG
company, like Dabur.

● Clearly, the ROE for Marico (37.67%) is more than the ROE for Dabur (30.95%). Comparing
each ratio part of the formula, we can see that even though Dabur has a greater Return on
Sales (ROS), Marico still gathers a greater ROE due to having a greater asset turnover ratio
and taking on higher leverage.
● Comparing the asset turnover ratio in the FMCG industry is a must, and Marico is much
better and faster at turning its assets into sales.
DCF Valuation :- (All values found from Annual Report for FY22)
Choosing the right DCF Model : The Free Cash Flow to Equity (FCFE) Approach is chosen for the
valuation of Marico. The following are the reasons for the same :
(a) Marico has maintained a constant Debt to Equity Ratio over the past 5 years.
(b) The Capital Expenditure was close to the value of Depreciation.
(c) The beta of the stock was found to be below one.
(d) Marico has had some debt repayments which are not considered in the FCFF Approach.

1. Calculation of Risk Free Rate : The Risk Free Rate of India is calculated by subtracting the
10 year government bond yield of India by the country default spread.
Current 10 year government bond yield = 7.286%
Country Rating = Baa3, therefore Country Default Spread = 1.87%
Risk Free Rate, Rf = 7.286% - 1.87% = 5.416%

2. Calculation of Market Risk Premium : The Market Risk Premium is calculated by

subtracting the Risk Free Rate from the Market Return. To calculate the Market Return, 10
year average returns of NIFTY50 were observed.
Market Return, Rm = (NIFTY50 value today/NIFTY50 value 10 years ago)^1/10 - 1
= 14.44%
Therefore, Market Risk Premium = Rm - Rf = 14.44% - 5.416% = 9.02%

3. Calculation of Beta : To find the levered beta of Marico, the average unlevered beta of
competitors was calculated. This was done using D/E, Levered Beta, and Tax Rate of the
Competitors, where Tax Rate = Current Tax Expense/PBT

Using this, the Levered Beta of Marico is computed.

Therefore, the Levered Beta of Marico = 0.368.

4. Calculation of Cost of Equity : The Cost of Equity is found out using the values of Risk
Free Rate, Market Risk Premium and Beta.
Cost of Equity = Rf + Beta*Market Risk Premium = 5.416% + 0.368*9.02% = 8.74%
5. Calculation of Non-Cash ROE :
Non-Cash ROE = (Net Income - After Tax Income from Cash and Marketable Securities) /
(Book Value of Equity - Cash and Marketable Securities)

The numerator is nothing but the Non-Cash Net Income,

= Rs 1,255 Cr - Rs 59 Cr *(1-0.2142) where 0.2142 is the tax rate calculated previously.
= Rs 1,208.64 Cr
The denominator value = Rs 3,405 Cr - Rs 579 Cr = Rs 2,826 Cr

Therefore, Non-Cash ROE = Rs 1,208.64 Cr / Rs 2,826 Cr = 42.77%

6. Calculation of Reinvestment Rate :

Reinvestment Rate = [(Net CapEx + Change in WC) - (New Debt Issues - Debt
Repayments)] / Net Income
Net CapEx = Depreciation + Change in PPE = Rs 139 Cr - Rs 129 Cr = Rs 10 Cr
(Values taken from Cash Flow from Investing Activities)
Change in WC = Working Capital in 2022 - Working Capital in 2021 - Cash in Hand
= Rs 1352 Cr - Rs 1323 Cr - 0 = Rs 29 Cr
Net Debts Issued = New Debt Issues - Debt Repayments = Rs 0 - Rs 106 Cr = - Rs 106 Cr
Net Income = Rs 1,255 Cr
Therefore, Reinvestment Rate = 11.55%

7. Calculation of Growth Rate : Growth Rate = Non-Cash ROE*Reinvestment Rate

Therefore, Growth Rate = 42.77% * 11.55% = 4.94%
The growth rate of the Indian Economy in 2021 was 8.3%, which is expected to go down to
7.7% in 2022. Thus, clearly Growth Rate of Marico < Growth Rate of Indian Economy
This means that the Single Stage Growth Model will be used for valuation.
8. Single Stage FCFE Model Calculations :

(a) Calculation of Non-Cash Net Income for Year 1

The Non-Cash Net Income that was calculated earlier (Year 0) is projected for the next year
(Year 1) using the growth rate. Therefore,
Non-Cash Net Income for Year 1 = Rs 1,208.64 Cr * (1+ 4.94%) = Rs 1,268.36 Cr

(b) Calculation of Free Cash Flow to Equity (Year 1) :

The Free Cash Flow to Equity for Year 1 is calculated by multiplying the Non-Cash Net
Income for Year 1 with (1-Reinvestment Rate) found earlier. Therefore,
FCFE (Year 1) = Rs 1,268.36 Cr * (1-11.55%) = Rs 1,121.82 Cr

(c) Calculation of Terminal Value:

The Terminal Value is found by dividing FCFE (Year 1) by the difference between Cost of
Equity and Growth Rate.
Therefore, Terminal Value = Rs 1,121.82 Cr / (8.74% - 4.94%) = Rs 29,532.24 Cr

(d) Calculation of Share Value :

Final Value of Equity = Terminal Value + Cash and Marketable Securities
= Rs 29,532.24 Cr + Rs 579 Cr = Rs 30,111.24 Cr

Number of Outstanding Shares of Marico = 1292000000

Therefore, Value per Share of Marico = Value of Equity / Number of Outstanding Shares
= Rs 30,111.24 Cr / 1292000000
= Rs 233.06

9. Final Verdict and Conclusions :

The current market price of Marico is Rs 501.50 whereas the price calculated using the
Single Stage FCFE Approach is Rs 233.06. This indicates that the stock is overvalued in
the markets.

To support these claims, the Price to Earnings (P/E) Ratio of Marico was compared with the
industry P/E ratio for the FMCG Industry. The Industry P/E Ratio is at 39.19 whereas the
P/E Ratio of Marico is 52.99. This clearly indicates that the market price of Marico is more
than its intrinsic value.

Additionally, the Price to Book (P/B) Ratio of Marico was also compared to the industry P/B
Ratio for the FMCG Industry. The Industry P/B Ratio is at 3.90 whereas the P/B Ratio of
Marico is 17.40. This also confirms the overvalued nature of the stock.
References and Bibliography :
1. https://marico.com/india/investors/documentation/annual-reports
2. https://www.screener.in/company/MARICO/consolidated/
3. https://in.investing.com/rates-bonds/india-10-year-bond-yield-historical-data
4. https://in.finance.yahoo.com/quote/MARICO.NS/key-statistics/
5. https://www.moneycontrol.com/india/stockpricequote/personal-care/marico/M13
6. https://www.topstockresearch.com/INDIAN_STOCKS/PERSONAL_CARE/PriceRangeOf
_Dabur_India_Ltd.html
7. https://www.topstockresearch.com/INDIAN_STOCKS/PERSONAL_CARE/PriceRangeOf
_Hindustan_Unilever_Ltd.html
8. https://www.investopedia.com/terms/p/porter.asp
9. https://marico.com/page/DigitalReport2019-2020/strategy.html
10. https://www.business-standard.com/article/companies/the-game-changes-for-marico-1
13052801200_1.html
11. https://www.citeman.com/17420-competitive-method-for-fmcg.html
12. https://www.feedough.com/cost-leadership-definition-examples-strategies/
13. https://www.bcg.com/about/overview/our-history/growth-share-matrix
14. https://www.investopedia.com/terms/b/bcg.asp
15. https://corporatefinanceinstitute.com/resources/management/strategic-analysis/