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 the leading position of Marico across product categories, its improving revenue diversity, healthy operating efficiency, and robust financial risk profile. These strengths are partially offset by exposure to intense competition in the fast-moving consumer goods (FMCG) sector and susceptibility to volatility in raw material price.

 

Operating performance is steadily improving in fiscal 2023 amidst slow consumption and high retail inflation environment and expected to be healthy in fiscal 2024. This will be supported by moderate pickup in urban demand, gradual revival in rural demand, sustained performance across the core domestic portfolios of Parachute coconut oil, Saffola edible oils, value-added hair oils and accelerated growth across the foods, premium personal care and digital first portfolios as well as continued momentum in the international markets. Operating margin is expected to sustain at 18-19% in fiscal 2023 and move up to 19%+ in fiscal 2024, aided by moderation in commodity prices, steady gross margin and cost-management programs adopted while maintaining investment in brand building across core and new franchises.

 

Financial risk profile has been healthy, with cash surplus of over Rs 1,800 crore as of September 2022, gearing of 0.14 time and largely unutilised working capital lines. The company is expected to have debt of more than Rs 350 crore at a consolidated level, which comprises working capital borrowing. 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

CRISIL Ratings has combined the business and financial risk profiles of Marico and all its direct and wholly owned subsidiaries, collectively referred to as Marico, as they are all involved in the same business. CRISIL Ratings 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 ~ 62% as on December 31, 2022.

 

Marico has been able to maintain the market leadership of its Saffola brand in the super premium refined edible oils in consumer packs segment, with a market share of ~83% as on March 31, 2022. Marico is also the market leader in the value-added hair oils category, with a 28% value market share as on December 31, 2022, with brands such as Nihar Naturals, Parachute Advanced and Hair & Care maintaining their stronghold. The market share remained steady across key product categories such as coconut oil, value-added hair oils and super premium refined edible oil in consumer packs during fiscal 2023.

 

Contribution of coconut oil and refined edible oil portfolio in the India business reduced to 65% in fiscal 2022 from 72% in fiscal 2012 and may further drop due to higher focus on newer and faster-growing product categories.

 

Revenue from the overseas operations has sustained its momentum owing to established market position, as indicated by the company’s presence in the coconut oil and value-added hair oils segments and relatively newer portfolios of shampoos, skin care and baby care in Bangladesh, the hair care segment in the Middle East and North Africa, the male grooming and ethnic foods segment in Southeast Asia, and the ethnic hair care and healthcare segments in South Africa. Healthy and broad-based growth in key markets helped sustain the share of international business to total revenue at 22-23% over the past three fiscals.

 

Healthy operating efficiency

Marico has a strong network of clearing and forwarding agents along with over 7,500 stockists and distributors providing a retail reach of about 56 lakh outlets in India and direct reach of over 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 profitability despite volatility in raw material prices, driven by its portfolio of strong brands, strong pricing power, controlled costs and pan-India distribution network.

 

Robust financial risk profile

Financial risk profile is supported by strong cash generation, robust capital structure, healthy debt protection metrics and prudent capital spending. Dividend payout has typically been 83-97% of profits in the past three years. The company has minimal long-term debt and bank limit utilisation. This, coupled with the absence of any large capital expenditure (capex), will lead to improved gearing. Liquidity is healthy, as reflected in low bank limit utilisation and liquid surplus.

 

Although the company is focusing on organic growth, it will keep an eye on opportunities with respect to acquisitions. However, due to strong liquidity, moderate-sized acquisitions can be accommodated without significant impact on the 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 position and pricing in the industry, competitive intensity will continue to be high with new product launches from other large players and emerging D2C players, especially in the premium segment.

 

Susceptibility to fluctuations in raw material prices 

Since cost of procuring the key raw materials -- copra, sunflower oil, rice bran oil and liquid paraffin and polymers -- account for more than 50% of sales, even a slight variation in price can drastically impact the operating margin. Their cost depends on geoclimatic conditions, international prices, and the domestic demand-supply situation.

 

Despite significant variation in raw material prices over the past three fiscals, the operating margin has sustained at 18-19%, supported by the market leadership in major segments. Focus on cost efficiency and the company’s continued price leadership should help mitigate the impact of volatility in raw material prices on profitability.

Liquidity: Superior

Liquidity should remain robust, supported by cash surplus of over Rs 1,800 crore as on September 30, 2022, and minimally utilised bank limit. Further, net cash generation is healthy at Rs 300-400 crore annually. Cash equivalents are largely invested in debt mutual funds and bank deposits.

Outlook: Stable

The business risk profile of Marico should remain 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

• The market share of Marico declining by 10% in key product segments and operating margin dropping below 15%
• Any large, debt-funded capex/acquisition

 

The Environment, Social, and Governance (ESG) profile of Marico supports its already strong credit risk profile.

 

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

 

Key ESG highlights

• After successful completion of Phase 1 targets, Marico declared its Phase 2 targets in June 2022. Marico plans to achieve Net Zero in operations by fiscal 2040 globally.
• As a part of its circular economy programme UPCYCLE, 96% of packaging material consumed by Marico is recyclable. It aims to reach 100% by fiscal 2025
• As on December 31, 2022, Marico has created 2.83 billion litre water conservation capacity, which is more than its operational water footprint. The company is offsetting 100% of its water consumption from the last five years.
• Marico has implemented multiple programmes for stakeholders: 46% of its critical supply chain vendors are certified for Level 1 under its responsible sourcing programme.
• Marico has better gender diversity with women constituting 15.57% of the total workforce, which compares well with peers.
• The governance structure is characterised by majority of the board comprising 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. The continuous commitment of Marico to embed sustainability principles across the organisation and its value chain will play a key role in enhancing stakeholder confidence.

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, health 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, Southeast Asia, and South Africa. The promoter group, Mr Harsh Mariwala and his family members, owns about 60% stake in Marico.

 

For the nine months ended December 31, 2022, Marico reported a profit after tax (PAT) of Rs 1,017 crore (Rs 998 crore in the corresponding period of the previous fiscal), on net revenue of Rs 7,524 crore (Rs 7,351 crore).

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	Foreign Exchange Forward*	NA	NA	NA	5	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	51	NA	CRISIL AAA/Stable

*FC/Derivative/CEL

**Working Capital Demand Loan