Marico One-off boosted 4Q profits :TP of Rs138: Macquarie Research,

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Marico
One-off boosted 4Q profits
Event
 Marico reported 4Q FY11 results, with 24% sales growth driven by 10% volume
growth. Adjusted to the sale of Sweekar brands (Rs0.5bn), reversal of excise
duty provisioning (Rs560mn) and one-offs costs (Rs165mn), net profit declined
35% YoY. As near-term margin and Middle East uncertainties are likely to
continue, we see short-term pressure on the company’s business and margins.
We change our rating to Neutral from Outperform with a revised TP of Rs138.


Impact
 One-offs boosted 4Q FY11 results. Marico reported sales growth of ~24%,
led by 9% domestic volume growth and 13% international volume growth.
Parachute (rigid packs) and Saffola volume growth was 5% and 14%,
respectively. However, reported net profit grew 40% YoY to Rs716mn due to
one-offs such as Sweekar divestment income (Rs500mn), reversal of excise
duty provisioning (Rs560mn), one-time finance charges (~Rs60mn) and
depreciation and amortisation expenses (Rs100mn). Stripping off one-off
charges, net profit declined 35% YoY to Rs369mn.
 Margin pressure continues due to copra inflation. Marico reported a
356bp decrease in its EBITDA margin, led by a 905bp increase in raw
material costs (Copra prices up 86% YoY) as a percent of sales despite ~32%
price hike in its key brand, Parachute. With no major softening in copra prices,
margin is likely to remain under pressure in 1H FY12E.
 Higher interest costs and accounting changes to hurt PAT. We expect
increased interest costs due to acquisition-related debt (net debt of ~ 5bn) and
depreciation and amortisation expenses due to accounting changes will
impact net profit going forward. Accounting change on revenue recognition at
Kaya (~Rs310mn) also impacted net profit in 4Q, and this is expected to
continue for the next two quarters once current paid packages are availed.
 Impact on Middle East business continues. Management has stated that
events in the Middle East have impacted its sales by ~Rs200mn in 4Q. They
believe a challenging business environment is likely to continue in the near term.
Earnings and target price revision
 We are cutting our FY12E and FY13E EPS by ~5% and roll forward our
model. We revise our TP to Rs138 from Rs145.
Price catalyst
 12-month price target: Rs138.00 based on a DCF methodology.
 Catalyst: Decline in raw material prices.
Action and recommendation
 Changing to Neutral from Outperform. We believe uncertainties in raw
material inflation and a challenging Middle East business environment will
weigh on Marico’s short-term performance. In our view, easing of raw material
prices and the Middle East situation will be the key events to watch for and
could be the game changers.