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Marico (MRCO.BO, Rs114, EW, PT Rs115)
Investment Thesis: Upgrade to EW
• We upgrade Marico to EW on recent stock
underperformance and higher than expected price
increase (~33%) in the core coconut oil portfolio.
• We continue to believe that the product life cycle for hair
oils in India may be close to its peak
• It will be a challenge for Marico to improve margins from
F2010 levels and maintain the organic growth momentum
seen during the last 10 years.
• Rising competitive threat from regional/local players.
• We await clarity on input cost (Copra) outlook and volume
trends following the sharp price increase to turn more
positive on the stock
Two Reasons for Upgrade to EW:
1) Recent stock underperformance – Marico is down nearly
15% from its recent peak, underperforming the Sensex by
over ~5%
2) Higher than expected price increase in the flagship
Parachute coconut oil portfolio.
Marico’s underperformance in a volatile market is driven by a
combination of sustained cost pressures, rising competitive
pressures from local/regional players and slowdown in the
organic revenue growth in the core CNO business, in our view.
We continue to believe that the product life cycle for hair
oils in India may be close to its peak. The pace of innovation
in the category has slowed. We forecast F2010-13 revenue
CAGR of 8% in the core coconut oil business vs. a F2002-10e
CAGR of around 15%. We believe it will be a challenge for
Marico to maintain the organic growth momentum seen during
the last 10 years. The company has effected a 32-33% price
increase in the key Parachute CNO portfolio. While this price
hike covers a large part of the cost push, volumes will likely
decline in 4Q and indeed F12. We believe it will be a challenge
for Marico to expand margins in the event of cyclical downtrend
in input costs.
What would make us more positive? Key input costs have
continued to rise for Marico, and the sharp price increases
taken by the company to cover RM inflation might impact hair
oil volumes in the near term. We await clarity on input cost
(Copra) outlook and volume trends to turn more positive on the
stock.
Investment Positives
Focused beauty and wellness player
Strong brand positioning in niche and profitable segments
High growth potential in the international markets
Investment Concerns
Potential levy of excise duty on coconut oils
Potential for consumers to substitute modern conditioners
with hair oils
Rise in regional competition with fall in input costs
F3Q11: 24% Price Hike in Parachute CNO, another 8-9%
coming – 3QF11 Result Above Expectation: Marico reported
3QF11 revenue, operating profit and adjusted PAT growth of
22%, (-)0.5% and 1% yoy respectively, which compares with
our expectations of 17%, (-)17% and (-)21% respectively. Key
highlights for the quarter 1) relatively disappointing 3% volume
growth yoy for the Parachute Coconut oil and 2) 300bps margin
decline driven by input costs pressures in both Coconut oil &
edible oil, partially offset by lower ad spends during the quarter.
With 32-33% price increase in the key Parachute CNO portfolio,
volumes will likely de-grow in 4Q. In the current environment,
Marico may be unable to expand margins in the event of
cyclical downtrend in input costs, we believe. We maintain our
UW rating on the stock.
Investment Thesis
• We believe it will be a challenge for
Marico to improve margins from F2010
levels and maintain the organic growth
momentum seen during the last 10
years.
• The product life cycle for hair oils in
India may be close to its peak. The
pace of innovation in the category has
slowed, we believe. We forecast
F2010-13E revenue CAGR of 8% in
the core coconut oil business for the
company vs. a F2002-10 CAGR of
around 15%.
• Marico has underperformed the
Sensex by ~5% since January in an
extremely volatile market. It now
trades at a 8.5% discount to peers
(20.5x F12E earnings).
Key Value Drivers
• Continued strong growth in the hair
care space driven by new product
introduction and increase in frequency
of usage.
• Success in expanding presence in
new product categories and
internationally.
• Profitable expansion of Kaya Clinics.
Potential Catalysts
• Sharp fall in input costs, copra and
safflower oil.
• Successful entry into new product
categories through expansion of the
Saffola brand.
• Turnaround in Kaya Skin business and
its Egypt business.
Key Risks
• Sharp fall in input costs.
• Marico uses its balance sheet to make
value accretive acquisitions.
• Hair Oiling trend remains strong in
India, driven by product activation and
innovation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Marico (MRCO.BO, Rs114, EW, PT Rs115)
Investment Thesis: Upgrade to EW
• We upgrade Marico to EW on recent stock
underperformance and higher than expected price
increase (~33%) in the core coconut oil portfolio.
• We continue to believe that the product life cycle for hair
oils in India may be close to its peak
• It will be a challenge for Marico to improve margins from
F2010 levels and maintain the organic growth momentum
seen during the last 10 years.
• Rising competitive threat from regional/local players.
• We await clarity on input cost (Copra) outlook and volume
trends following the sharp price increase to turn more
positive on the stock
Two Reasons for Upgrade to EW:
1) Recent stock underperformance – Marico is down nearly
15% from its recent peak, underperforming the Sensex by
over ~5%
2) Higher than expected price increase in the flagship
Parachute coconut oil portfolio.
Marico’s underperformance in a volatile market is driven by a
combination of sustained cost pressures, rising competitive
pressures from local/regional players and slowdown in the
organic revenue growth in the core CNO business, in our view.
We continue to believe that the product life cycle for hair
oils in India may be close to its peak. The pace of innovation
in the category has slowed. We forecast F2010-13 revenue
CAGR of 8% in the core coconut oil business vs. a F2002-10e
CAGR of around 15%. We believe it will be a challenge for
Marico to maintain the organic growth momentum seen during
the last 10 years. The company has effected a 32-33% price
increase in the key Parachute CNO portfolio. While this price
hike covers a large part of the cost push, volumes will likely
decline in 4Q and indeed F12. We believe it will be a challenge
for Marico to expand margins in the event of cyclical downtrend
in input costs.
What would make us more positive? Key input costs have
continued to rise for Marico, and the sharp price increases
taken by the company to cover RM inflation might impact hair
oil volumes in the near term. We await clarity on input cost
(Copra) outlook and volume trends to turn more positive on the
stock.
Investment Positives
Focused beauty and wellness player
Strong brand positioning in niche and profitable segments
High growth potential in the international markets
Investment Concerns
Potential levy of excise duty on coconut oils
Potential for consumers to substitute modern conditioners
with hair oils
Rise in regional competition with fall in input costs
F3Q11: 24% Price Hike in Parachute CNO, another 8-9%
coming – 3QF11 Result Above Expectation: Marico reported
3QF11 revenue, operating profit and adjusted PAT growth of
22%, (-)0.5% and 1% yoy respectively, which compares with
our expectations of 17%, (-)17% and (-)21% respectively. Key
highlights for the quarter 1) relatively disappointing 3% volume
growth yoy for the Parachute Coconut oil and 2) 300bps margin
decline driven by input costs pressures in both Coconut oil &
edible oil, partially offset by lower ad spends during the quarter.
With 32-33% price increase in the key Parachute CNO portfolio,
volumes will likely de-grow in 4Q. In the current environment,
Marico may be unable to expand margins in the event of
cyclical downtrend in input costs, we believe. We maintain our
UW rating on the stock.
Investment Thesis
• We believe it will be a challenge for
Marico to improve margins from F2010
levels and maintain the organic growth
momentum seen during the last 10
years.
• The product life cycle for hair oils in
India may be close to its peak. The
pace of innovation in the category has
slowed, we believe. We forecast
F2010-13E revenue CAGR of 8% in
the core coconut oil business for the
company vs. a F2002-10 CAGR of
around 15%.
• Marico has underperformed the
Sensex by ~5% since January in an
extremely volatile market. It now
trades at a 8.5% discount to peers
(20.5x F12E earnings).
Key Value Drivers
• Continued strong growth in the hair
care space driven by new product
introduction and increase in frequency
of usage.
• Success in expanding presence in
new product categories and
internationally.
• Profitable expansion of Kaya Clinics.
Potential Catalysts
• Sharp fall in input costs, copra and
safflower oil.
• Successful entry into new product
categories through expansion of the
Saffola brand.
• Turnaround in Kaya Skin business and
its Egypt business.
Key Risks
• Sharp fall in input costs.
• Marico uses its balance sheet to make
value accretive acquisitions.
• Hair Oiling trend remains strong in
India, driven by product activation and
innovation.
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