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Marico posted mix set of numbers for 2QFY2011. While overall volume growth
stood at a strong 15%, price cuts in core brands continued to drag overall
top-line growth (unfavourable base). In terms of profitability, while earnings grew
by a modest 15% yoy boosted by higher other income and lower tax rate,
operating profit grew only 4.5% yoy impacted by the 270bp contraction in gross
margin due to rising input costs. We recommend Neutral view on the stock.
Strong volume growth, low tax boost earnings: Marico posted a steady top-line
growth of ~12.5% yoy to `779cr led by strong 15% volume growth. Its core
brands Parachute and Saffola posted volume growth of 10% and 18%
respectively. Management guided for a further ~6-7% price hike in Parachute
(~5% already implemented in August). Kaya grew 28% yoy (including Derma Rx)
and 2% yoy (excluding Derma Rx) with declining sequential losses in standalone
Kaya. International business continued its steady momentum with 23% growth in
constant currency terms (18% adjusted for rupee appreciation). In terms of
earnings, Marico posted a growth of 15% yoy to `71.6cr driven by higher other
income and lower tax rate. EBITDA grew at a muted 4.5% yoy due to the sharp
270bp contraction in margins on account of timing mismatch between rising input
costs and price hikes.
Outlook and Valuation: We expect 2HFY2011 to be significantly better than
1HFY2011 owing to the recent price hikes in Parachute, improving profitability in
international business, and 3) lower tax rate. However, due to the recent run up
in the stock price, at the CMP of `133, the stock is trading at 23.5x FY2012E
earnings, (in line with historical valuations) leaving little room for upside. Hence,
we recommend Neutral view on the stock.
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