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Marico |
Match-Making Done, Upgrade to ACCUMULATE |
ACCUMULATE
CMP: Rs 124 Target Price: Rs 142
n Marico’s Q3FY11 marginally above expectation - APAT at Rs695 mn versus EMKAY expectation of Rs667 mn
n Volume growth at 15% for Q3FY11 – Hair Oils (31%) and International Business (25%) offsets lower growth in Parachute (3%) and Saffola (13%)
n Match-Making Done - 24% price increase in ‘Parachute’ and 12% price increase in ‘Saffola –For-- YTD rise in Copra prices @ 62%, Safflower @ 25% and Rice Bran @ 3%
n Marico has adhered to unit price formula and not deviated from its focus on absolute Ebidta – Upgrade to ACCUMULATE with revised target price of Rs142/Share
Q3FY11 performance marginally above expectation - APAT at Rs695 mn
versus expectation of Rs667 mn
Marico Q3FY11 performance is marginally above expectation- APAT at Rs695 mn
versus expectation of Rs667 mn. Key highlights are (1) 22.1% yoy growth in revenues
to Rs7.8 bn (2) no change in Ebidta at Rs997 mn and (3) APAT growth of 11.8% yoy to
Rs695 mn. Blended volume growth in the quarter at 15.0% yoy, balance from price
increase. Also, international business registered robust performance with 33% revenue
growth, which was driven 25% by volume growth and 8% price-led growth. Even, Kaya
business registered 11% revenue growth, whereas including Derma RX registered 40%
revenue growth to Rs620 mn.
Volume growth of 15% in Q3FY11 – Hair Oils and International Business
offsets lower growth in base brands in India
Volume growth at 15% in Q3FY11, largely continuation of growth momentum – 15% in
Q1FY11 and Q2FY11 and 14% in Q4FY10. But, 17% price hike (excluding January
2011) in Parachute resulted in only 3% volume growth in the quarter. Saffola registered
volume growth of 13%, influenced by promotion scheme in preceding quarter. Hair Oils
portfolio reported 31% volume growth, strongest in recent quarters. Even, international
business comprising Marico Bangladesh, Egypt and South Africa acquisition reported
25% volume growth. It offset the lower volume growth of base brands in Indian
business.
24% price increase in ‘Parachute’ and 12% price increase in ‘Saffola
YTD price increase in Parachute is 24% and YTD price increase in Saffola is 12%.
Marico implemented 4 price increases in Parachute – August 2010 @ 5%, September
2010 @ 8%, December 2010 @ 5% and January 2011 @ 7%. The corresponding YTD
rise in Copra prices @ 62%, Safflower @ 25% and Rice Bran @ 3%. With its strategy to
protect the unit margins, price increases would largely offset the input-cost rise (YTD)
and benefit should flow in ensuing quarters. We expect improvement in gross margins
and Ebidta margins in ensuing quarters.
Adheres to unit margins formula, no deviation from strategy
Marico has yet again adhered to unit margin formula and not deviated from its focus on
absolute Ebidta in business. It also showcases the confidence on Parachute and Saffola
brand to maintain market shares and maintain median volume growth. So far, in YTD period
Parachute and Saffola volume growth is 7% and 16%, equal to median volume growth.
Refreshing FY10- Drawing Parallel?
Input cost pressure on Marico? - is the buzzword – top of the mind and bone of contention.
It seems to overshadow the efficacy and strength of brand portfolio and strict adherence to
unit margin formula. Infact, 2HFY09 and 1HFY10 had identical chronology of event with
current time period – input cost pressure – resultant price increases --- eventual collapse of
input price – partial retention of price increases. This eventually triggered series of earnings
upgrades driven by gross margin upgrades. Only difference is current period of high food
inflation and its impact on volume growth. Hence, volume growth behavior in ensuing
quarters would remain key monitorable.
Fine-tune earnings – Revise FY11E by -3.3% and FY12E by +1.5%
We have fine-tuned assumptions to factor (1) sharp rise in input costs and (2) price
increases on key brands. We have revised revenues by +3.6% for FY11E and +9.9% for
FY12E. Owing to unit margin formula, revise Ebidta margin by -90 bps and -100 bps for
FY11E and FY12E respectively. Consequently, we have revised earnings by -3.3% for
FY11E and +1.5% for FY12E to Rs4.7/Share and Rs6.0/Share respectively. We also
introduce FY13E earnings of Rs6.9/Share.
Upgrade from HOLD to ACCUMULATE with revised target price of
Rs142/Share
History indicates that agri-commodities have tendency to play havoc for shorter-term,
especially so for Marico whose chief raw materials are Copra and Safflower. Also, Marico
has adhered to unit price formula and not deviated from its focus on absolute Ebidta – as
reflected from 24% price increase in Parachute and 12% increase in Saffola. It also
showcases the confidence on Parachute and Saffola brand to maintain market shares and
maintain median volume growth. We roll valuations to FY13E and upgrade our rating from
HOLD to ACCUMULATE with revised target price of Rs142/Share – discounting FY13E
earnings at PER 20.6X (equal to 5-year average).
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