Marico- 3QFY11 – Strong volume; lower margin: Anand Rathi

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Marico
3QFY11 – Strong volume; lower margin
Marico reported 12% net profit growth despite steep inflationary
pressures and also maintained a strong volume growth of 15%.
We expect the growth momentum to continue in coming
quarters, and earnings CAGR of 26% over FY10-13e. Buy.

 Volume growth momentum intact. Marico reported strong
revenue growth of 22% in 3QFY11, with volume growing 15%.
Parachute, Saffola and value-added oils registered volume growth
of 14%, 13% and 31% respectively. International business saw
33% revenue growth.
 Higher raw material prices impact margin. EBITDA margin
was lower 256bps due to higher raw material prices. Major raw
material Copra prices are up 62% yoy. Also, prices of crude oil
derivatives such as HDPE and liquid paraffin are trading 20%
higher. Net profit is up 12% yoy due to lower income tax.
 Outlook. The company has hiked prices to pass on major part of
increase in raw material prices. We believe impact of price hikes in
Dec ’10 and Jan ’11 will be seen in 4QFY11 and onwards. We
expect the company to report strong volume growth in coming
quarters but margin to remain under pressure for 1-2 quarters.
 Valuation and risks. We value the stock at `158 at target PE of
24x FY12e earnings. Our target PE is at 35% premium to 12-
month forward Nifty PE (5 year average premium 25%). Key
risks: higher raw material prices and keener competition.