Marico Industries: Growth caught in an oil slick - Elara Capital

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Growth caught in an oil slick
Growth tapers down, international business provides succour
The quarter result numbers validate our concern about the tapering
growth going forward for Marico. The company reported 12.5% (YoY)
top line growth coming off from 14.7% in Q2FY10. Our key concern
has been the slowing CAGR for the company from 27.8% during FY06-
09 to 23.5% during FY07-10. International business, however, supports
the momentum and has shown ~23% top line growth, driven by the
volume uptick of 18%.
Scalability to be a challenge across hair, edible oils
The company is facing scalability challenges across its core business of
hair and edible oils. The volume growth of Parachute coconut oil in
rigid packs was flat at 10% in Q2FY11. Saffola has seen a volume
growth slow down to 18% in Q2FY11 vis-a vis ~22% in Q2FY10. The
company is facing a high degree of competitive pressure and has not
been able to expand its product portfolio from coconut hair oil to light
and cooling hair oil after years of several launches.
Higher raw material prices expected to shrink margins
The higher copra price in Q2FY11 dragged down the EBITDA margin
in Q2FY11 by 98 bps to 12.7%. Copra price inflation of 15% (YoY) in
H1FY11 and 26% (YoY) in Q2FY11 primarily accounted for the margin
loss. We find Kardi prices to escalate in low single digit going ahead
while Copra is expected to witness continued inflationary pressures.
Valuation and recommendation
Although the company commands a strong brand equity in niche
segments, it faces the risk of being dependent on very limited
categories for future growth and volatility of the key raw material -
Copra and Kardi prices. At the current price, the stock is trading at
27.7x FY11E earnings of INR 4.8 and 23.4x FY12E EPS of INR 5.7,
which is fairly valued for the current expectation from the company.
We do not see a case for a major multiple expansion for Marico from
here on and retain our ‘Reduce’ rating on the stock with the target
price of INR136.