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Marico
Deteriorating quality of earnings + YTD outperformance = Downgrade to IN-LINE
We downgrade to IN-LINE as 1) quality of earnings are
deteriorating and 2) having outperformed the Sensex by
26%, valuations are stretched (FY12 P/E of 26x is at a
20% premium to historical median).
The deteriorating return ratio (because of acquisitions,
higher investments in international and Kaya) is a cause
of concern and can lead to a de-rating of the stock.
4Q FY11 results disappointing – Consolidated net sales
grew 24% but EBITDA, PBT and adjusted PAT declined
by 7%, 28% and 22%. We cut our EPS estimates for
FY12 / FY13 by 2% / 4% due to lower margins.
Limited upside; Downgrade to IN-LINE. We downgrade to
IN-LINE as 1) at FY12E P/E of 26x, Marico trades at a
significant premium of 20% to its five-year median, 2) recent
rally in the stock (up 26% YTD relative to the Sensex)
leaves little room for upside, and 3) deteriorating return
ratios. Our price target stands at Rs142 (valuing it at FY13
P/E of 22x).
Deteriorating quality of earnings. We expect Marico to
post sales & EPS CAGR of 16.1% & 23.6%, respectively
over FY11-13E but we note that the quality of earnings is
deteriorating significantly. Acquisitions, rising investments in
international business and Kaya coupled with increased
working capital requirements (up from 22 days in FY08 to
50 days in FY11) has resulted in a decline of return ratios
(RoE is down from 67% in FY08 to 37% in FY11).
Disappointing 4Q FY11 results. Sharp price hikes along
with unrest in the MENA region resulted in low volume
growth of 10%, out of which organic growth was only 5%.
Better realisations enabled 24% consolidated sales growth.
Coconut oil volume grew by ~3% and IBD volume was up
13% in 4Q FY11 as compared to 20% in 9M FY11. Saffola
and Hair oil volume were up by 14% and 21%, respectively.
Consolidated EBITDA, PBT & Adj. PAT decline in 4Q.
Unabated inflation in input costs (copra was up ~80% yoy
and ~20% qoq) led to 356bps yoy decline in consolidated
EBITDA margins. Price hikes to the tune of 32% in
Parachute and 15-20% in Saffola, 25% cut in ad spend
could not counter the 905bps yoy increase in input cost-tosales. Consolidated EBITDA declined 7.3% yoy; Higher
interest due to acquisitions led to PBT declining 28% yoy.
Risks. Key upside risk is a decline in the price of copra,
which comprises ~40% of raw material costs. Downside risk
would be an unfavourable decision in the excise issue.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Marico
Deteriorating quality of earnings + YTD outperformance = Downgrade to IN-LINE
We downgrade to IN-LINE as 1) quality of earnings are
deteriorating and 2) having outperformed the Sensex by
26%, valuations are stretched (FY12 P/E of 26x is at a
20% premium to historical median).
The deteriorating return ratio (because of acquisitions,
higher investments in international and Kaya) is a cause
of concern and can lead to a de-rating of the stock.
4Q FY11 results disappointing – Consolidated net sales
grew 24% but EBITDA, PBT and adjusted PAT declined
by 7%, 28% and 22%. We cut our EPS estimates for
FY12 / FY13 by 2% / 4% due to lower margins.
Limited upside; Downgrade to IN-LINE. We downgrade to
IN-LINE as 1) at FY12E P/E of 26x, Marico trades at a
significant premium of 20% to its five-year median, 2) recent
rally in the stock (up 26% YTD relative to the Sensex)
leaves little room for upside, and 3) deteriorating return
ratios. Our price target stands at Rs142 (valuing it at FY13
P/E of 22x).
Deteriorating quality of earnings. We expect Marico to
post sales & EPS CAGR of 16.1% & 23.6%, respectively
over FY11-13E but we note that the quality of earnings is
deteriorating significantly. Acquisitions, rising investments in
international business and Kaya coupled with increased
working capital requirements (up from 22 days in FY08 to
50 days in FY11) has resulted in a decline of return ratios
(RoE is down from 67% in FY08 to 37% in FY11).
Disappointing 4Q FY11 results. Sharp price hikes along
with unrest in the MENA region resulted in low volume
growth of 10%, out of which organic growth was only 5%.
Better realisations enabled 24% consolidated sales growth.
Coconut oil volume grew by ~3% and IBD volume was up
13% in 4Q FY11 as compared to 20% in 9M FY11. Saffola
and Hair oil volume were up by 14% and 21%, respectively.
Consolidated EBITDA, PBT & Adj. PAT decline in 4Q.
Unabated inflation in input costs (copra was up ~80% yoy
and ~20% qoq) led to 356bps yoy decline in consolidated
EBITDA margins. Price hikes to the tune of 32% in
Parachute and 15-20% in Saffola, 25% cut in ad spend
could not counter the 905bps yoy increase in input cost-tosales. Consolidated EBITDA declined 7.3% yoy; Higher
interest due to acquisitions led to PBT declining 28% yoy.
Risks. Key upside risk is a decline in the price of copra,
which comprises ~40% of raw material costs. Downside risk
would be an unfavourable decision in the excise issue.
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