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MARICO 2QFY11: Below est; Volumes up 15%; Rising Copra prices a key risk; Downgrade to Neutral
Marico (MRCO IN, Mkt Cap US$1.8b, CMP Rs133, Neutral) 2QFY11 results are below estimates at operating level.
- Net sales grew 12.5% to Rs7.8b (est Rs8.2b) led by healthy volume growth of 15%. Realization declined on account of carryover impact of price cuts.
- In volumes, Parachute (rigid packs) grew 10%, Saffola 18%, and hair oils 14%.
- Gross margins contracted 250bp YoY to 50.2%, but lower ad spend (down 120bp) restricted EBITDA margin contraction at 160bp to 12.2% (est 13%).
- The company received sales tax refund of Rs44m relating to prior years, which we have taken as extraordinary income. Marico has reduced it from other expenses.
- Lower tax rate (down 200bp), rising profit share of international business and higher other income (up 70% YoY) enabled Adj PAT growth of 7.7%.
Parachute volumes (rigid packs) up 10%; Saffola franchise up 18%
- Volume growth momentum remained intact for Marico, even as value growth declined due to carryover impact of price cuts.
- Domestic sales growth of 10% was largely volume led (~11.5%) as product prices (both Parachute and Saffola) remained lower YoY.
- Parachute (rigid packs) volumes grew 10% YoY; market share of Marico in the ~Rs19b pure coconut oil category stood at ~53%.
- Saffola volumes were up 18% YoY; the brand strengthened its market share to 51% in the premium refined edible oil segment.
- Value-added hair oil grew 14% YoY; growth would have been higher but for late Diwali sales this year (vs 2Q in FY10).
- Initiatives of market share/entry in new segments like cooling oil and ayurvedic hair oil check continue to gain momentum with encouraging response to Shanti Badam Amla (15% market share in Aug), Parachute Advanced Coconut Cooling Oil (8% market share in AP) and Parachute Therapie (re-launched at Rs99/100ml).
Lower realizations, high copra prices impact margins; 7-8% price increase in Parachute underway
- Consolidated gross margin contracted 250bp on account of lower realizations (carryover impact of price cuts) and sharp increase in Copra prices.
- Copra prices are up 26% YoY in 2QFY11 (15% in 1HFY11). We note that price run-up of ~25% during the past 2 months is yet to get reflected in the financials due to inventory, which indicates further cost push during 3QFY11.
- Post the initial price increase of 5% in August (excluding flexi packs, 25% of volumes), another round of price increase of 7-8% across Parachute SKUs is underway, and is likely to partially cover the input cost increase.
- Management expects prices of Copra to come off post festive season as demand for edible oil comes down. Other key input like Kardi is down 6%, while Rice Bran oil is up 23%.
- We now factor in 280bp gross margin decline in FY11 (250bp earlier) to factor in the changes in input costs and pricing actions. We believe copra price trend remains a key downside risk to our estimates.
International business sales up 23% (18% adjusted for currency); cross selling of products across categories open new growth avenues
- Marico's international business has posted 23% sales growth during the quarter (~18% in rupee terms) led by strong volumes (18%) and price increases (5%).
- In Bangladesh, Parachute continues to gain market share from smaller players, with market share up from 76% to 79% in recent months. Marico is leveraging the distribution reach of Parachute in Bangladesh to cross-sell brands from other geographies - Hair Code hair dye (MENA brand) is No2 brand in its category, while Marico recently launched Saffola edible oil as well.
- In MENA market, both Parachute Cream and Parachute Gold hair oil continued healthy growth. Egyptian business continued its strong growth momentum. Egyptian portfolio was augmented with two key brands from MENA market during the past 6 months, while launch of Hair Code in Egypt is underway.
- South African business sales are up 31% YoY with contribution from all major brands. During the quarter, the company acquired OTC healthcare brand Ingwe to strengthen its reach in independent trade channel.
- Management expects international business to sustain 20%+ growth in coming years; EBITDA margins are likely to expand to 13-14% by FY12 (currently 11-12%).
Kaya: 6% decline in SSS in Indian operations, Derma Rx acquisition enables EBITDA break-even
- Kaya Skin Care reported sales of Rs624m (up 28% YoY) and PBT of Rs9m. Adjusted for consolidation of new acquisition (Derma Rx), sales growth stood at 2%, while the business continued to be in red (loss of Rs35m).
- Same Store Sales in Indian operations de-grew 6%, while consolidated operations (including Middle East clinics) reported SSS decline of growth of 3%.
- The management sounded optimistic on sequential improvement in customer response to Kaya franchise helped by recent initiatives like new launches (e.g. Everyday Radiance), backed by communication campaign.
- New acquisition Derma Rx reported sales of Rs120m (on a standalone basis) and operates at a healthy margin of ~20%. Management targets to roll-out products from Derma Rx in their Kaya clinics to increase share of products to 20%, thereby improving SBU margins.
- The management reiterated that Indian operations would not be adding clinics in FY11 and has highlighted the likelihood of break-even in 2HFY12.
Estimate 18% PAT CAGR over FY10-12; Copra prices key downside risk to our margin assumption; Downgrade to Neutral
- Strong growth in Saffola and value-added hair oils are positive. We expect higher growth rate in these segments due to management initiatives to create niches.
- We believe recent price hikes in Parachute (5% in August and 8% in Oct/Nov) are the steepest in past few years which will impact consumer upgradation from loose oil to branded oils, more so in recruiter packs which were spared from any price hike until now. Moreover, these price increases will not fully cover the recent spike in copra prices. Although we are reducing gross margin estimates for FY11 from 50.2% to 49.9%, we are factoring in moderation in copra prices by ~20% in flush season. Lower decline in prices during the flush season can lead to gross margins ending up lower than our estimates.
- Management has guided for 300bp lower tax rate (acquisition of edible oil unit in Baddi), which partially offsets the impact of EBITDA margin contraction. Our EPS estimates largely remain unchanged at Rs4.7 for FY11 and Rs5.8 for FY12, implying FY10-12 EPS CAGR of 18.5%.
- The stock trades at 28x FY11E and 23x FY12E. We believe the stock is fairly priced given downside risk to estimates. The company commands valuations in line with some of the mid-tier FMCG companies despite having inferior ratios (payout ratio of 14% and ROE of 33%). Downgrade to Neutral.
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