January 30, 2006

Rational allocation of capital – A case study of Marico


First the disclaimer – The post is not an attempt to recommend marico as an investment (and definitely at these price levels). I do own the stock and have tracked the company for more than 5 years. The post is an attempt to give an example of a company which has a rational capital allocation policy. It does not mean that there are’nt other companies which do so. But I have found only a few companies which would return cash to the shareholder than just hoard it or worse just blow it in unrelated accquistions. Actually I have held stocks of a few such companies in the past.

Marico industries just announced the accquisiton of the brand nihar from HLL india for around 100 crores (not a 100 % sure on this) . This is however not the first brand accqusition of marico.

Marico has accquired a few small brands such as
manjal and oil of malabar (not sure on this one) in the past. I have seen a resonably rational attitude towards capital allocation

This is a company with a consistent ROCE of 30% + and Debt equity of less than 0.2 for around 8-10 years. The company is in an industry with low to moderate growth rates (FMCG). As a result the company has had an excess of cash for quite some time.

Over the years I have seen the company do the following with the free cash flow

  • pay down the debt through the excess cash flows to close to 0 debt position by 2003-04 ( the Debt equity ratio was as high as 0.8 in 1994)

  • resonable dividend payout ratios of 40% or higher

  • accquisition of brands / businesses in related businesses – hair care, skin care etc such as manjal, nihar and oil of malabar.

  • development of business in related areas through new products/ services such as kaya or through geographical expansion in bangladesh and middle-east.

  • Return money to shareholder through preference issues (there was a bonus issue, but I would not call that return of capital)

Overall I have seen the capital allocation policy of the company to be fairly rational with the ROCE in excess of 30 % for the last 10+ years . In addition the company has a fairly detailed annual report and has quarterly updates which are more detailed than the annual report of several companies. Marico discusses in fair detail its business performance for every quarter.

Although there are companies which are better in terms of growth and return on capital than marico and I hold a few of them, my comfort with marico has been higher due to transparency of the company in terms of its communication. Have a look at their
investor centre (go to the menu on the left) and you will agree with me. When I look for fresh investment opportunities, I try to compare the level of disclosure and communication of that company with what I get with marico.

4 comments:

Prasanth said...

I was actually thinking of a post on Marico but you beat me to it !!. Agree with your observations on the company but alas, at the current price level, it is out of my reach.

Rohit said...

yes, good to time to buy was back in 2003 and 2004 when marico for selling 250 odd pre-bonus

theb said...

Rohit bhai study shree cements probably way better than marico. Marico to large extent is comparable to pidilite

Unknown said...

Hi Rohit,

I have known this company since 2006 and have kept away as I thought it was over valued (premium multiples) at each stage. Learnt the hard way as to why it's better to pay up for quality. The information about the Debt reduction you mentiones here was extremely useful and I have included that as a check point.

Thanks,
Hari G