Rating Rationale
May 24, 2019 | Mumbai
Marico Limited
Long-term rating upgraded to 'CRISIL AAA/Stable'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.291 Crore
Long Term Rating CRISIL AAA/Stable (Upgraded from 'CRISIL AA+/Positive')
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the long-term bank facilities of Marico Limited (Marico) to 'CRISIL AAA/Stable' from 'CRISIL AA+/Positive' while reaffirming its rating on the short term bank facilities at 'CRISIL A1+'.

The upgrade reflects CRISIL's belief that the company will maintain its strong operating performance over the medium term, driven by established brands with leading market position in most product categories, healthy profitability, and initiatives to diversify its product offerings. Healthy cash generating ability and synergistic growth plans funded prudently, will also ensure sustenance of its solid financial risk profile. Further, the company is expected to continue to maintain robust liquidity, which will also allow for modest sized acquisitions, without materially impacting its credit profile.

Marico's business strengths stem from the dominant market position of core brands, Parachute and Saffola (market share of 59% and 73% in coconut oil and Super premium refined edible oil in consumer packs, respectively) and increasing market share in product categories such as value added hair oil (VAHO), healthy foods and male grooming. Further, revenue diversity is likely to continue improve with higher growth in product categories such as healthy foods, skin care and male grooming. Marico has increased its share of revenue from healthy foods (saffola oats contribution ~2-3% in fiscal 2019 from < 1% in fiscal 2015), male grooming (contributing ~3%) and value added hair oils (contributing 25% in fiscal 2019 from 24% in fiscal 2015) in the India business.

Marico has been strengthening its position in coconut oil (Parachute, Oil of Malabar and Nihar Rigids) and VAHO (Parachute Advansed, Nihar Naturals, Shanti Amla and Hair & Care) reflected in increase in volume market share by 3% and 6% respectively over five fiscals ended 2019.  Also, Saffola edible oil segment has shown recovery in both volume and value growth in fiscal 2019 with volume growth at 8% (-1% in fiscal 2018) on account of revamped marketing strategy and initiatives taken towards re-establishing Saffola's superior product proposition, deploying tactical pricing and revising segmentation of Saffola Oils' different brands.

Healthy compounded annual growth of 10% over 5 fiscals through 2019, which was better than its peers, was driven by increasing rural reach (contribution increased to 32% in fiscal 2019 from 26% in fiscal 2010), better than industry growth in key segments such as coconut oil, healthy foods and contribution of new product launches. CRISIL expects Marico's revenue growth to sustain at ~10% over the medium term driven by strong new product pipeline, diverse product portfolio, increasing distribution reach and geographic diversity.

Complementing the strong market position is steady improvement in operating efficiency reflected in healthy operating margin of 17-19% and return on capital employed (RoCE) of 41%. Going forward, expected increase in premium product mix, improved profitability of international business and strong pricing power across segments will benefit to sustain operating margin at ~16-18% despite planned increase in promotional spend.
 
Healthy cash accrual, as against limited capital expenditure (capex) and efficient working capital management, have helped to maintain a healthy capital structure (gearing of 0.15 times as on March 31, 2019). While domestic fast-moving consumer good (FMCG) players, including Marico, remain on the lookout for acquisitions, the company is likely to maintain its gearing and other key credit metrics at comfortable levels.

Marico had cash surpluses of Rs 960 crore as on March 31, 2019 and largely unutilized working capital lines of Rs. 150 crore. The company is expected to generate robust cash accruals of over Rs. 400 crore per year and has modest capex plans of Rs.125-150 crore. The cash surplus is likely to be maintained at healthy levels, and may partly be used to enhance in-house capacities and support new product and category launches, besides possible mid-sized acquisitions.

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

Analytical Approach

For arriving at its ratings, CRISIL 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 a similar 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. It's Parachute and Nihar Naturals brands make it the market leader in the Indian branded coconut oil market, with an overall volume market share of around 59% (for year ending March 31,2019). Also, as a result of a strong brand portfolio that comprises Parachute Advanced, Hair & Care, and Nihar Naturals, Marico is the largest player in the value-added hair oils segment as well, with a volume market share of 34%. In the premium refined edible oil segment, Marico enjoys strong brand equity with Saffola. Marico has been able to maintain the market leadership of its Saffola brand in the super premium refined edible oil segment, with a market share of 73%. In addition, it has also ventured into the healthy foods category (under the Saffola brand) and maintains a strong market position in the oats (breakfast cereal) segment with 29% market share and market leadership in masala oats (with 72% market share) with double digit growth over past 5 years. There have been market share gains across product categories such as coconut oil, value added hair oils, super premium refined edible oil in consumer packs,  male grooming, during the year to fiscal 2019.
 
Going forward, strong position in key segments and entry into adjacencies along with increased focus on newer categories such as premium healthy foods (Fittify saffola and coco soul), male grooming (Set Wet Studio X range), hair nourishment (Livon, Parachute Advansed Coconut Crème, True Roots) and skin care (Kaya Youth O2, Parachute Advansed Body Lotion) will support to sustain leading margin position.
 
The company has acquired 45% stake in Beardo of Zed Lifestyle (men's grooming salon brand) and strategic investment of 22.5% in Revofit (health and wellness platform) to increase its penetration in the adjacent segments. The benefits of these acquisitions or new launches will accrue over time and will help gradually reduce dependency on core categories. Contribution of coconut oil and edible oil portfolio reduced to 63% in fiscal 2019 from 72% in fiscal 2012, CRISIL expects the same to gradually reduce going forward, on the back of higher focus on other product categories
 
The company has also established itself in international markets, as indicated by its 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 segment in South-East Asia, and the ethnic hair-care and healthcare segments in South Africa. Healthy growth in key markets such as Bangladesh benefited to sustain the share of international business to total revenue at 22% over last 3 fiscals despite headwinds in other markets. 
 
* Healthy operating efficiency
Operating efficiency is healthy, supported by robust RoCE of around 41%(for fiscal 2019) and a strong network of 26 clearing and forwarding agents and about 5600 stockiest and distributors, providing a retail reach of about 50 lakh outlets in India and direct reach of 9 lakh outlets. Expected increase in rural reach and focus on direct reach and modern trade (including ecommerce) will help to sustain healthy volume growth in future. The company also benefits from its cost effective and well-established sourcing strategy for its raw materials, primarily copra.
 
The margins in the domestic business moderated to 19.6% in fiscal 2019 from 21.3% in fiscal 2018 due to high input costs in first half of the fiscal which was partially offset by improvement in profitability in international business.
 
* Healthy financial risk profile:
Marico's healthy financial risk profile is supported by its strong cash generating ability, and low debt on its balance sheet, translating into robust credit metrics. Efficient working capital management and moderate capex intensity, has allowed the company to make few acquisitions without denting its credit metrics, and also shore up its liquidity robust levels to ~Rs.950 crore.
 
The company is expected to continue with acquisitions as it pursues growth. However, due to strong liquidity, moderate-sized acquisitions can be accommodated without material impact on key credit metrics. Any sizeable debt funded acquisition, will remain a key monitorable.
 
Weaknesses
* Exposure to intense competition in the 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 competitive position and pricing in the industry, CRISIL believes that competitive intensity will continue to be high with new product launches from the 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 accounts 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 profitability was sustained at 17-19% supported by a market leadership. A focus on cost efficiencies and its continued price leadership should help mitigate the impact of volatility in raw material prices on the margins.
Liquidity

Marico has robust liquidity, supported by cash surpluses of almost Rs.960 crore as on March 31, 2019 and minimally utilized bank limits. Further, cash generation is healthy at over Rs.400 crore annually. Cash equivalents are largely invested in debt mutual funds and bank deposits.

Outlook: Stable

CRISIL believes Marico will maintain its strong business risk profile, supported by its established market position in various product categories. Financial risk profile should remain healthy, supported by strong cash accrual and a comfortable capital structure.

Downward scenario
The outlook may be revised to 'Negative' if:
* Significant erosion in Marico's market share in key product segments, thereby adversely affecting the company's business risk profile

* Substantial decline in operating margin, liquidity or any large debt-funded capex or, impacting the financial risk profile.

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, hair care, healthy foods and male grooming in India. The company also has a 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, the Mariwala family, owns about 60% stake in Marico.

Key Financial Indicators - CRISIL Adjusted financials 
Particulars for Fiscal Unit 2019 2018
Revenue Rs crore 7350 6327
Adjusted Profit After Tax Rs crore 1097 783
PAT margins % 14.9 12.4
Adjusted Debt/Adjusted Net worth Times 0.15 0.16
Interest coverage Times 58.51 73.07

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Rating assigned with outlook
NA Cash Credit & Working Capital demand loan* NA NA NA 146 CRISIL AAA/Stable
NA Letter of credit & Bank Guarantee NA NA NA 145 CRISIL A1+
*Working Capital Demand Loan
 
Annexure - List of Entities Consolidated
Name of Entities Consolidated Relationship
Marico Bangladesh Limited Subsidiary
MBL Industries Limited Subsidiary
Marico Consumer Care Limited Subsidiary
Marico Middle East FZE Subsidiary
MEL Consumer Care SAE Subsidiary
Egyptian American Company for Investment and Industrial Development SAE Subsidiary
Marico South Africa (Pty) Limited Subsidiary
Marico South Africa Consumer Care (Pty) Limited Subsidiary
Marico Egypt for industries SAE Subsidiary
Marico for Consumer Care Products SAE Subsidiary
Marico Malaysia Sdn. Bhd Subsidiary
Marico South  East Asia Corporation Subsidiary
Marico Innovation Foundation Subsidiary
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --    --  10-05-18  Withdrawal  28-04-17  CRISIL A1+  11-04-16  CRISIL A1+  CRISIL A1+ 
            26-04-18  CRISIL A1+           
Non Convertible Debentures  LT    --    --    --    --  11-04-16  Withdrawal  CRISIL AA+/Stable 
Fund-based Bank Facilities  LT/ST  146.00  CRISIL AAA/Stable      10-05-18  CRISIL AA+/Positive  28-04-17  CRISIL AA+/Positive  11-04-16  CRISIL AA+/Stable  CRISIL AA+/Stable 
            26-04-18  CRISIL AA+/Positive           
Non Fund-based Bank Facilities  LT/ST  145.00  CRISIL A1+      10-05-18  CRISIL A1+  28-04-17  CRISIL A1+  11-04-16  CRISIL A1+  CRISIL A1+ 
            26-04-18  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit & Working Capital demand loan* 146 CRISIL AAA/Stable Cash Credit & Working Capital demand loan* 146 CRISIL AA+/Positive
Letter of credit & Bank Guarantee 145 CRISIL A1+ Letter of credit & Bank Guarantee 145 CRISIL A1+
Total 291 -- Total 291 --
*Working Capital Demand Loan
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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