Marico- Good performance in tough times: Macquarie Research

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Marico
Good performance in tough times
Event
 Marico reported 3QFY11 results with 22% sales growth driven by 15% volume
growth and 28% growth in International business. Net profit grew 12% to
Rs695mn and was 3% ahead of our estimates. We reiterate our Outperform
rating, as we believe cost pressure is likely to ease in coming months.

Impact
 Sales led by strong 15% volume growth. Consolidated sales grew 22% to
Rs8.2bn, driven by 15% volume growth. Domestic sales grew ~19% (~10%
volume growth), led by 28% and 17% growth in rural and urban India. Sales of
flagship brands ‘Parachute' coconut hair oil and 'Saffola' refined edible oil
recorded volume growth of ~3% (5% in rigid pack) and 13%, respectively.
 28% sales growth in International business. International business sales
grew ~33% (~28 in domestic currency) driven by ~25% volume growth. In key
international markets such as Bangladesh, North Africa, Middle East and
South Africa, Marico’s products have either gained or retained market share.
 Margin declined 256bp on higher input costs. EBITDA margin declined by
256bp YoY to 12.2% due to a 536bp increase in raw material costs (copra
prices were up 62%YoY). Lower A&P (↓176bp) and other expenses (↓77bp),
however, partially offset margin decline from raw materials. We believe worst
may be over for Marico in terms of margins given
Marico has taken a 24% price hike in Parachute in FY11 (13.5% in 3Q)
including 8-9% price increases being implemented currently.
Copra prices are likely to soften from the current record levels after the
new crop reaches the market in Feb-March 2011.
 Kaya turnaround on track. Kaya skin clinics recorded 11% YoY (ex-Derma
Rx), aided by 10% same clinic sales (SCS). Including Derma Rx, sales
increased 40% YoY to Rs620m, with PBT of Rs41mn. SCS in India grew 8%
supported by promotion.  We expect Kaya to break even in FY12 on the back
of corrective steps taken by Marico and growing share of products sales.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs145.00 based on a DCF methodology.
 Catalyst: Decline in Copra prices
Action and recommendation
 Maintain Outperform. We believe robust performance of flagship brands and
new launches provides strong medium- and long-term growth visibility to
Marico. Our positive view on Marico is based on margin improvement from
softening in raw materials and turnaround in Kaya profitability