Marico - Key takeaways from management meet - by Anand Rathi

Marico - Key takeaways from management meet

After meeting Marico’s management, we retain a Buy, with a target of `158. As both the key brands Parachute and Saffola are doing well and as recent price hikes lessen risk of lower margins, we expect Marico to report a 27% earnings CAGR over FY10-12.

n       Parachute continues to do well. Marico raised prices of some of the key SKUs of Parachute, by 3%, after the increase in copra prices, of almost 20% yoy. It is ready for one more round of price hikes if copra prices climb further.  It indicated that the volume growth continues to be strong despite the price hikes.

n       To maintain EBITDA margins around 13-14%. With rising copra prices and media inflation, Marico’s margins were expected to come under pressure. However, select price hikes and the launch of only two new brand extensions under Saffola would help maintain margins in the range of 13% to14%. With the availability of MAT credit, management expects the effective tax rate in FY11 to be around 16%.

n       To focus on Saffola Rice and Oats in FY11. Earlier, the company had conducted prototyping for various Saffola brand extensions like Snacking category products. However, it indicated that with healthy consumer feedback, it would focus largely on Saffola Arise (rice) and Saffola Oats in FY11.

n       Valuation. We value the stock at a target of `158 (Mar ’11) at a PE of 23x FY12e earnings. Our target PE is at a 35% premium to the 12-month forward Nifty PE (past five-year average premium: 25%). Key risks: higher raw material prices and competition.