Rating Rationale
June 25, 2020 | Mumbai
Marico Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.393 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank facilities of Marico Limited (Marico).
 
Operating performance of Marico in March 2020 and fiscal 2021 is expected to be impacted due to nationwide lockdown imposed by various state governments towards containment of Covid-19. The precautionary measures implemented during the lockdown disrupted supply chains and restricted discretionary spending by consumers.
 
Revenue was flattish in fiscal 2020 owing to slowing demand, especially in rural, in the first nine months and impact of the pandemic during the fourth quarter of the fiscal. However, the operating margin improved to 20.1% during fiscal 2020 from 18.1% in fiscal 2019 owing to favorable raw material prices especially that of copra, which was down by 9% on an average compared to the previous fiscal.
 
Operating revenue is likely to decline in the first quarter of fiscal 2021 as an impact of the economic slowdown caused by the nationwide lockdown imposed to curb the spread of the pandemic; revenue should however gradually recover from the second quarter onwards. Benign raw material prices coupled with cost management could support operating margin in fiscal 2021 to sustain at fiscal 2020 levels.
 
Financial risk profile has been healthy, with cash surpluses of ~Rs 600 crore, gearing of 0.10 times and largely unutilised working capital lines worth Rs 150 crore as on March 31, 2020. The company is expected to generate robust cash accrual of over Rs 200-400 crore per annum over the medium term, further supported by modest capital expenditure (capex) worth Rs 100-150 crore. The surplus cash 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 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.

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 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 62% (for year ending March 31, 2020).
 
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 76%. The market share remained intact across product categories such as coconut oil, value-added hair oils, super premium refined edible oil in consumer packs and male grooming during fiscal 2020.
 
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 thus gradually reduce dependency on core categories. Contribution of coconut oil and refined edible oil portfolio in the India business reduced to 64% in fiscal 2020 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 should remain intact 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 2020, with a strong network of 25 clearing and forwarding agents and about 7,000 stockist and distributors providing a retail reach of over 50 lakh outlets in India and direct reach of over nine 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 also benefits from its cost-effective and well-established sourcing strategy for raw materials, primarily copra. Operating margin was healthy in fiscal 2020 due to disinflationary raw material prices; the margin could sustain in fiscal 2021 due to benign raw material prices and cost management practices.
 
* Healthy financial risk profile
The financial risk profile should continue to be supported by strong cash-generating ability, and low debt, 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.600 crore as on March 2020.
 
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 credit metrics. 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 ~ Rs 600 crore as on March 31, 2020, and minimally utilised bank limit. Further, cash generation is healthy at over Rs 200-400 crore annually. Cash equivalents are largely invested in debt mutual funds and bank deposits.

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.

Key Financial Indicators - CRISIL adjusted financials
Particulars for fiscal Unit 2020 2019
Revenue Rs crore 7315 7334
Adjusted profit after tax (PAT) Rs crore 1043 926
PAT margins % 14.2% 12.6%
Adjusted debt/adjusted networth Times 0.10 0.11
Interest coverage Times 73.8 57.6

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 146 NA CRISIL AAA/Stable
NA Letter of credit & Bank Guarantee NA NA NA 145 NA CRISIL A1+
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 102 NA CRISIL AAA/Stable
*Working capital demand loan
 
Annexure - List of entities consolidated
Name of Entities Consolidated Relationship
Marico Bangladesh Ltd Subsidiary
MBL Industries Ltd Subsidiary
Marico Consumer Care Ltd 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) Ltd Subsidiary
Marico South Africa Consumer Care (Pty) Ltd 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 2020 (History) 2019  2018  2017  Start of 2017
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+  CRISIL A1+ 
                26-04-18  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  248.00  CRISIL AAA/Stable      10-06-19  CRISIL AAA/Stable  10-05-18  CRISIL AA+/Positive  28-04-17  CRISIL AA+/Positive  CRISIL AA+/Stable 
            24-05-19  CRISIL AAA/Stable  26-04-18  CRISIL AA+/Positive       
Non Fund-based Bank Facilities  LT/ST  145.00  CRISIL A1+      10-06-19  CRISIL A1+  10-05-18  CRISIL A1+  28-04-17  CRISIL A1+  CRISIL A1+ 
            24-05-19  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 AAA/Stable
Letter of credit & Bank Guarantee 145 CRISIL A1+ Letter of credit & Bank Guarantee 145 CRISIL A1+
Proposed Long Term Bank Loan Facility 102 CRISIL AAA/Stable Proposed Long Term Bank Loan Facility 102 CRISIL AAA/Stable
Total 393 -- Total 393 --
*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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