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Profit warning by Marico
Marico (MRCO IN) has issued a press release stating that it will be difficult to
meet analyst estimates (FY12 consensus EPS growth estimate of ~16%)
largely due to higher costs. We would not extrapolate the concerns to the rest
of the sector to the same degree, though, as Marico’s cost pressures are
unique. Its key input – copra – is up nearly 80% YoY during YTD FY12. Rich
valuation of the sector leave a little room for disappointment and we maintain
U-PF on HUL, Dabur, Marico, Colgate and Nestle. ITC, GCPL and United Spirits
are our preferred picks in the sector.
Marico’s input base resulting in pressures; shouldn’t be extrapolated to sector
q Marico has a unique product positioning with high dominance of oils (hair and
edible) oils which implies high dependence on oil price table.
q High commodity inflation is a key concern as prices of key input, copra (coconut;
~40% of overall material cost) is up 80% during YTD FY12.
q Interestingly, despite a 32% product price hike effected during six months ended
Mar-11, the hikes have not fully offset the impact of input cost inflation.
q While input cost inflation in general is a concern for the sector, we note that the
impact for FMCG peers would not be as magnified.
Some slowdown in discretionary; staples not seeing any slowdown, so far
q Marico has indicated that there have been signs of slowdown of overall consumer
demand in India due to factors like high (food) inflation, interest rate hikes etc.
q The management also states that there could be some effect of overall macro
weakness on its discretionary portfolio (Kaya, Saffola).
q Our interaction with the management indicates that there is no visible slowdown so
far, but the company is cautious in its outlook, mainly for discretionary portfolio.
q Our recent meeting with market leader, Hindustan Unilever also indicates that the
momentum is strong and there are no signs of slowdown or downtrading.
q In this context, we note that retail firms like Pantaloon, Shoppers Stop etc have
been seeing some slowdown in same store sales growth recently which implies
some signs of slowdown in the discretionary spending.
Sector valuations at historic high levels; be selective
q Indian Consumer stocks have outperformed the Sensex in the last 3m/6m/12m,
thanks to high earnings visibility and strong cash flow generation.
q We note that rich valuations of the sector leave a little room for disappointment.
q We prefer names where earnings visibility is relatively higher along with valuation
support and prefer ITC (cigarettes), Godrej Consumer (hair colour, household); we
also like United Spirits despite high leverage due to reasonable valuations.
q Our negative recs are HUL, Nestle, Marico, Dabur, Colgate.
Key extracts from Marico’s release
Area Key comments
Overall demand
q …. expected lowering of the GDP growth estimates would have
some, if not major, effect on consumer demand especially for
items of discretionary consumption in our portfolio.
A&P expenses
q Marico has had a slew of new offerings to the Consumer in
recent times.… A&P that may have a marked skew over the next
few quarters. This may influence the operating margins in a
different manner from quarter to quarter.
Input costs
q Copra market has seen an unprecedented inflation, with prices in
YTD FY12 being higher than those in YTDFY 11, by ~80%.
q Stronger link between Vegetable Oil price table and the Fuel Oil
price table, because of the increasing use of vegetable oils as
non-conventional energy sources.
q An Increase in funds flowing into the commodities as an asset
class, some of the funds being speculative…
q it is still unclear whether the Copra bull-run denotes a structural
upward shift in copra prices.
q We expect that it will take us a couple of quarters to gauge the
trend in the right manner and modify our strategies accordingly.
Price hikes
q In the recent past, we have taken several increases in retail
prices of several of our products.
q Considering the magnitude of the overall absolute price
increases taken, we may leave such shortfall as it is. This would
affect our operating margins in the short run.
International business q The business ambience in the Middle East and North Africa
(MENA) region continues to be uncertain.
Overall message
q On balance, we sense that the numbers expected from us by
Financial Community members, especially Stock Market
participants, are somewhat excessive.
q … there is a possibility of our PAT for the next couple of quarters
falling short of the current expectations of market participants
particularly our investors and stock analysts.
Source: CLSA Asia-Pacific Markets
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Profit warning by Marico
Marico (MRCO IN) has issued a press release stating that it will be difficult to
meet analyst estimates (FY12 consensus EPS growth estimate of ~16%)
largely due to higher costs. We would not extrapolate the concerns to the rest
of the sector to the same degree, though, as Marico’s cost pressures are
unique. Its key input – copra – is up nearly 80% YoY during YTD FY12. Rich
valuation of the sector leave a little room for disappointment and we maintain
U-PF on HUL, Dabur, Marico, Colgate and Nestle. ITC, GCPL and United Spirits
are our preferred picks in the sector.
Marico’s input base resulting in pressures; shouldn’t be extrapolated to sector
q Marico has a unique product positioning with high dominance of oils (hair and
edible) oils which implies high dependence on oil price table.
q High commodity inflation is a key concern as prices of key input, copra (coconut;
~40% of overall material cost) is up 80% during YTD FY12.
q Interestingly, despite a 32% product price hike effected during six months ended
Mar-11, the hikes have not fully offset the impact of input cost inflation.
q While input cost inflation in general is a concern for the sector, we note that the
impact for FMCG peers would not be as magnified.
Some slowdown in discretionary; staples not seeing any slowdown, so far
q Marico has indicated that there have been signs of slowdown of overall consumer
demand in India due to factors like high (food) inflation, interest rate hikes etc.
q The management also states that there could be some effect of overall macro
weakness on its discretionary portfolio (Kaya, Saffola).
q Our interaction with the management indicates that there is no visible slowdown so
far, but the company is cautious in its outlook, mainly for discretionary portfolio.
q Our recent meeting with market leader, Hindustan Unilever also indicates that the
momentum is strong and there are no signs of slowdown or downtrading.
q In this context, we note that retail firms like Pantaloon, Shoppers Stop etc have
been seeing some slowdown in same store sales growth recently which implies
some signs of slowdown in the discretionary spending.
Sector valuations at historic high levels; be selective
q Indian Consumer stocks have outperformed the Sensex in the last 3m/6m/12m,
thanks to high earnings visibility and strong cash flow generation.
q We note that rich valuations of the sector leave a little room for disappointment.
q We prefer names where earnings visibility is relatively higher along with valuation
support and prefer ITC (cigarettes), Godrej Consumer (hair colour, household); we
also like United Spirits despite high leverage due to reasonable valuations.
q Our negative recs are HUL, Nestle, Marico, Dabur, Colgate.
Key extracts from Marico’s release
Area Key comments
Overall demand
q …. expected lowering of the GDP growth estimates would have
some, if not major, effect on consumer demand especially for
items of discretionary consumption in our portfolio.
A&P expenses
q Marico has had a slew of new offerings to the Consumer in
recent times.… A&P that may have a marked skew over the next
few quarters. This may influence the operating margins in a
different manner from quarter to quarter.
Input costs
q Copra market has seen an unprecedented inflation, with prices in
YTD FY12 being higher than those in YTDFY 11, by ~80%.
q Stronger link between Vegetable Oil price table and the Fuel Oil
price table, because of the increasing use of vegetable oils as
non-conventional energy sources.
q An Increase in funds flowing into the commodities as an asset
class, some of the funds being speculative…
q it is still unclear whether the Copra bull-run denotes a structural
upward shift in copra prices.
q We expect that it will take us a couple of quarters to gauge the
trend in the right manner and modify our strategies accordingly.
Price hikes
q In the recent past, we have taken several increases in retail
prices of several of our products.
q Considering the magnitude of the overall absolute price
increases taken, we may leave such shortfall as it is. This would
affect our operating margins in the short run.
International business q The business ambience in the Middle East and North Africa
(MENA) region continues to be uncertain.
Overall message
q On balance, we sense that the numbers expected from us by
Financial Community members, especially Stock Market
participants, are somewhat excessive.
q … there is a possibility of our PAT for the next couple of quarters
falling short of the current expectations of market participants
particularly our investors and stock analysts.
Source: CLSA Asia-Pacific Markets
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