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Marico Limited
Step Up in Margins Unlikely
To Sustain; Volumes To Take
Precedence
What's Changed
Rating Equal-weight to Underweight
Price Target Rs115.00 to Rs134.00
EPS – F12, F13 +9.3%, +0.4%
Moving to UW as the product life cycle for Indian
hair oil is peaking and the pace of innovation has
slowed, making organic growth more challenging.
Also, we believe the stock price implies an overly
optimistic 55% gross margin for coconut oil (CNO)
products. Our price target implies 14% downside.
Where we differ: Marico has outperformed the market
by 30% over the past 6 months driven by combination of
sharp price increases, sustained volume growth and a
recent fall in input costs, leading to expectations of
higher operating margins. In contrast, we expect Marico
to pass through input cost benefits to sustain volume
growth momentum, capping margin expansion at 30bps
over the next 3 years.
What’s in the price: ~55% gross margin in CNO; we
forecast just 45%. After ~18% fall in Copra prices from
recent peak, we calculate the market is implying that
over 55% gross margin (similar to previous peak in F10)
is sustainable in the key Parachute portfolio. We think
~45% is more likely. We note the last time Copra prices
fell 20% from peak levels, gross margin increased
600bps but operating margin rose only 140bps due to
sharp rise in advertising spend. For F2012, our base
case already assumes 110bps increase in margins,
which largely drives our F12 earnings revision.
Where could we be wrong: In the event that
management decides to focus on near-term profits,
margin expansion may be higher than expected.
However, we believe this will be at the cost of long-term
volume growth, a key driver, in our view, of earnings
multiples for the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Marico Limited
Step Up in Margins Unlikely
To Sustain; Volumes To Take
Precedence
What's Changed
Rating Equal-weight to Underweight
Price Target Rs115.00 to Rs134.00
EPS – F12, F13 +9.3%, +0.4%
Moving to UW as the product life cycle for Indian
hair oil is peaking and the pace of innovation has
slowed, making organic growth more challenging.
Also, we believe the stock price implies an overly
optimistic 55% gross margin for coconut oil (CNO)
products. Our price target implies 14% downside.
Where we differ: Marico has outperformed the market
by 30% over the past 6 months driven by combination of
sharp price increases, sustained volume growth and a
recent fall in input costs, leading to expectations of
higher operating margins. In contrast, we expect Marico
to pass through input cost benefits to sustain volume
growth momentum, capping margin expansion at 30bps
over the next 3 years.
What’s in the price: ~55% gross margin in CNO; we
forecast just 45%. After ~18% fall in Copra prices from
recent peak, we calculate the market is implying that
over 55% gross margin (similar to previous peak in F10)
is sustainable in the key Parachute portfolio. We think
~45% is more likely. We note the last time Copra prices
fell 20% from peak levels, gross margin increased
600bps but operating margin rose only 140bps due to
sharp rise in advertising spend. For F2012, our base
case already assumes 110bps increase in margins,
which largely drives our F12 earnings revision.
Where could we be wrong: In the event that
management decides to focus on near-term profits,
margin expansion may be higher than expected.
However, we believe this will be at the cost of long-term
volume growth, a key driver, in our view, of earnings
multiples for the company.
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