Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank facilities of Marico Limited (Marico).

 

The ratings continue to reflect Marico’s leading position across product categories, improving revenue diversity, healthy operating efficiency, and a robust financial risk profile. These strengths are partially offset by the susceptibility of the operating margin to competition and to volatility in raw material price.

 

Revenue growth for Marico in fiscal 2022 is likely to be supported by recovery in urban demand, sustained performance across its core portfolios of Parachute Coconut Oil, Saffola Edible Oils, Value Added Hair Oils and Saffola Oats, recovery in international markets, better distribution strategy and launches in the Foods category. Despite supply chain related disruption in early fiscal 2021, the company reported healthy growth of 10%, supported by strong growth in Saffola Edible Oils, Foods and Parachute Coconut Oil segments and price hikes in the key portfolios to counter the steep input cost inflation during the year. Operating margin is expected to sustain in the range of 19-21% supported by cost control measures, calibrated price hikes to offset the commodity inflation, while continuing to actively invest in brand building across the core and new franchises.

 

Financial risk profile has been healthy, with cash surpluses of over Rs 1300 crore, gearing of 0.14 times and largely unutilised working capital lines. The company is expected to have minimal debt of ~150 crore which is majorly short term debt to fund its working capital requirements. Company’s surplus cash may partly be used to enhance in-house capacities and support new product and category launches, besides possible mid-sized acquisitions.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Marico and all its direct and wholly owned subsidiaries, collectively referred to herein as Marico, as they are all involved in the same business. CRISIL has also amortised the goodwill on overseas acquisitions (for International Consumer Products Corporation, Vietnam; Rs 221 crore starting from fiscal 2011 and Rs 236 crore from fiscal 2015) over a period of five fiscals.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leading position across product categories and improving product diversity

The company has a leading position in the branded coconut oil market in India. Its brands, Parachute, Nihar Naturals and Oil of Malabar are well reputed, with an overall volume market share of around 61% (for year ending March 31, 2021).

 

Marico has been able to maintain the market leadership of its Saffola brand in the super premium refined edible oil in consumer packs segment, with a market share of 81%as on March 31, 2021. The market share continued to rise across key product categories such as coconut oil, value-added hair oils and super premium refined edible oil in consumer packs during fiscal 2021.

 

The company acquired additional 55% stake in Zed Lifestyle (parent of start-up men's grooming salon brand, Beardo) in July 2020 (45% stake was held in March 2020), making it its subsidiary. Marico plans to build a digital portfolio of at least three Rs. 100 crore plus brands by fiscal 2024 and has announced strategic investment in the brand Just Herbs in line with its expansion strategy. The benefits of these acquisitions or new launches will accrue over time and thus gradually reduce dependency on core categories. Contribution of coconut oil and refined edible oil portfolio in the India business reduced to 62% in fiscal 2021 from 72% in fiscal 2012 and may further drop going forward due to higher focus on other product categories.

 

Despite the impact of the pandemic, sales from overseas operations has remained steady owing to established market position, as indicated by the company’s presence in the coconut oil and hair-care segments in Bangladesh, the hair-care segment in the Middle East and North Africa, the male grooming and ethnic foods segment in South-East Asia, and the ethnic hair-care and healthcare segments in South Africa. Healthy growth in key markets such as Bangladesh helped sustain the share of international business to total revenue at 22-23% over the last three fiscals, despite headwinds in other markets.

 

• Healthy operating efficiency

Return on capital employed was a robust 55% in fiscal 2021, with a strong network of 25 clearing and forwarding agents and about 7,300 stockist and distributors providing a retail reach of about 53 lakh outlets in India and direct reach of nearly 10 lakh outlets. Expected increase in rural reach and focus on direct reach and modern trade (including ecommerce) will help sustain healthy volume growth in the future. The company has maintained operating profitability despite volatility in raw material prices driven by controlled costs, pan India distribution network and strong pricing power.

 

• Healthy financial risk profile

The financial risk profile should continue to be supported by strong cash-generating ability, and low debt, translating into robust debt metrics. Efficient working capital management and moderate capex intensity has allowed the company to make few acquisitions without denting its debt metrics, and also shore up its liquidity to robust levels of ~Rs.1490 crore as on March 2021.

 

While focusing on organic growth, the company will remain opportunistic with respect to acquisitions as it pursues growth. However, due to strong liquidity, moderate-sized acquisitions can be accommodated without material impact on key debt metrics. Nevertheless, any sizeable, debt-funded acquisition will remain a key monitorable.

 

Weaknesses:

• Exposure to intense competition in the fast-moving consumer goods (FMCG) industry

Intense competition has reduced the ability of players to pass on any increase in raw material prices. While Marico has fairly been able to maintain its position and pricing in the industry, competitive intensity will continue to be high with new product launches from other large players, especially in the premium segment.

 

• Susceptibility of profitability to fluctuations in raw material prices 

The cost of key raw materials, copra, safflower, rice bran and liquid paraffin and polymers, account for more than 50% of sales. Their prices depend on geo-climatic conditions, international prices, and the domestic demand-supply situation. Hence, the operating margin is partially susceptible to fluctuations in raw material prices.

 

Despite significant variation in these prices over the past three fiscals, operating margin was sustained at 18-20%, supported by the market leadership in major segments. A focus on cost efficiencies and its continued price leadership should help mitigate the impact of volatility in raw material prices on profitability.

Liquidity: Superior

Marico has robust liquidity, supported by cash surpluses of over 1200 crore as on March 31, 2021 and minimally utilised bank limits. Further, cash generation is healthy at over Rs 800-900 crore annually. Cash equivalents are largely invested in debt mutual funds and bank deposits.

 

ESG Profile:

CRISIL Ratings believes that Marico’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The FMCG sector has a moderate environmental and social impact, primarily driven by its raw material sourcing strategies, waste intensive processes, and its direct impact on the health and wellbeing of its customers.

 

Marico’s strong focus on addressing these ESG risks supports its already strong credit risk profile.

 

Key ESG Highlights:

• Marico planned to reduce the Green House Gas (GHG) emission intensity by 75% by fiscal 2022 from base year of fiscal 2013. As on March 31, 2021, Marico has exceeded its target and has achieved 80% reduction in emission intensity.
• Marico, through its circular economy program “UPCYCLE”, has achieved 95% recyclability of packaging material.
• As of March 31, 2021, Marico has created 2.15 billion liter water conservation capacity, which is more than its operational water footprint. The Company is offsetting 100% of its water consumption from last 4 years.
• Marico has implemented multiple programs for stakeholders: 38% of its critical supply chain vendors are certified for Level 1 under its responsible sourcing program, ‘SAMYUT’. Under “Parachute Kalpavriksha” program, ~41000+ coconut farmers benefitted through scientific farming knowledge for productivity improvement.
• Marico has better gender diversity with women constituting 15.4% of the total workforce, which compares well with the peers, and 40% of leadership hires in fiscal 2021 were women.
• Marico’s  governance structure is characterized by majority of board comprising of independent directors, presence of non-executive chairman, split in chairman and CEO position, and extensive disclosures.

There is growing importance of ESG among investors and lenders. CRISIL Ratings believes the company’s continuous commitment to embed sustainability principles across the organization and its value chain will play a key role in enhancing stakeholder confidence.

Outlook: Stable

Marico’s business risk profile should continue to be strong, supported by its established market position in various product categories. Financial risk profile is also likely to remain healthy, aided by strong cash accrual and a comfortable capital structure.

Rating Sensitivity factors

Downward factors:

• Significant erosion in Marico’s market share by 10% in key product segments, and decline in operating margin to below 15%
• Any large, debt-funded capex/acquisition

About the Company

Marico, incorporated in 1988, is a prominent FMCG company, with diverse product portfolio including coconut oil, hair oils, premium refined edible oils in consumer packs, premium hair care, healthy foods and male grooming in India. The company also has presence in the hair care, healthcare and male grooming segments in Bangladesh, the Middle East, North Africa, South-east Asia, and South Africa. Currently, the promoter group, Mr. Mariwala and his family members, owns about 60% stake in Marico.

 

For the half year ended September 30, 2021, Marico reported a profit after tax (PAT) of Rs. 681 crore (Rs. 661 crore in corresponding period of previous fiscal), on net revenues of Rs. 4996 crore (Rs. 3960 crore)

Key Financial Indicators - CRISIL Ratings adjusted financials

Particulars for fiscal Unit 2021 2020 Revenue Rs crore 8048 7315 Adjusted profit after tax (PAT) Rs crore 1162 1043 PAT margins % 14.4% 14.3% Adjusted debt/adjusted networth Times 0.14 0.15 Interest coverage Times 48.79 31.14

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Cash Credit & Working Capital Demand Loan*	NA	NA	NA	321	NA	CRISIL AAA/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	280	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	51	NA	CRISIL AAA/Stable

*Working capital demand loan

Annexure – List of entities consolidated

Name of Entities Consolidated	Extent of Consolidation	Relationship
Marico Bangladesh Ltd	90%	Subsidiary
MBL Industries Ltd	100%	Subsidiary
Marico Consumer Care Ltd	100%	Subsidiary
Marico Middle East FZE	100%	Subsidiary
MEL Consumer Care SAE	100%	Subsidiary
Egyptian American Company for Investment and Industrial Development SAE	100%	Subsidiary
Marico South Africa (Pty) Ltd	100%	Subsidiary
Marico South Africa Consumer Care (Pty) Ltd	100%	Subsidiary
Marico Egypt for industries SAE	100%	Subsidiary
Marico for Consumer Care Products SAE	100%	Subsidiary
Marico Malaysia Sdn Bhd	100%	Subsidiary
Marico South  East Asia Corporation	100%	Subsidiary
Marico Innovation Foundation	NA	Subsidiary