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Marico (MRCO.BO)
Buy Equity Research
High input costs to pressure margins, volumes intact; Retain Buy
What's changed
Marico issued an update post market on Sept 14, warning that consensus
operating margin estimates for FY12E were unlikely to be met by the
company given: (1) input costs, which remain high; (2) the fragile demand
environment given recent events in the global economy; and (3) recent
accounting changes in Kaya and the international business. The company
has stated a preference for maintaining volume growth at the cost of
margins over the near term by not taking any further price increases.
Implications
We believe that volume growth and margin expansion are unlikely to
coexist for the Indian FMCG sector given high input costs and slowing
economic growth. While we had forecast a decline in margins for FY12E,
we are further reducing our EBITDA margin estimates to 11.8% from 12.8%
to reflect input costs and cut our FY12E-FY14E EPS estimates 6%-7%. We
maintain our volume growth forecasts of 10% for the domestic business in
FY12E and 18% organic volume growth for the international business.
Valuation
We retain our Buy rating as we believe medium- to long-term prospects
for the company remain intact, with robust domestic volume growth in its
franchise brands, improving returns for the international business, and
Kaya on track to generating profits following the restructuring of its
business. In line with our earnings revisions, we cut our 12-month 25X
FY13E EPS-based target price to Rs163 from Rs174. Our target price is
also supported by Director’s Cut analysis. While at 24.4X FY13E the stock
is trading close to our target multiple, we believe it offers the best riskreward potential in our India consumer staples coverage universe.
Key risks
(1) Change in consumer preferences away from hair oil; (2) sustained input
cost pressure; and (3) slower-than-expected turnaround at Kaya.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Marico (MRCO.BO)
Buy Equity Research
High input costs to pressure margins, volumes intact; Retain Buy
What's changed
Marico issued an update post market on Sept 14, warning that consensus
operating margin estimates for FY12E were unlikely to be met by the
company given: (1) input costs, which remain high; (2) the fragile demand
environment given recent events in the global economy; and (3) recent
accounting changes in Kaya and the international business. The company
has stated a preference for maintaining volume growth at the cost of
margins over the near term by not taking any further price increases.
Implications
We believe that volume growth and margin expansion are unlikely to
coexist for the Indian FMCG sector given high input costs and slowing
economic growth. While we had forecast a decline in margins for FY12E,
we are further reducing our EBITDA margin estimates to 11.8% from 12.8%
to reflect input costs and cut our FY12E-FY14E EPS estimates 6%-7%. We
maintain our volume growth forecasts of 10% for the domestic business in
FY12E and 18% organic volume growth for the international business.
Valuation
We retain our Buy rating as we believe medium- to long-term prospects
for the company remain intact, with robust domestic volume growth in its
franchise brands, improving returns for the international business, and
Kaya on track to generating profits following the restructuring of its
business. In line with our earnings revisions, we cut our 12-month 25X
FY13E EPS-based target price to Rs163 from Rs174. Our target price is
also supported by Director’s Cut analysis. While at 24.4X FY13E the stock
is trading close to our target multiple, we believe it offers the best riskreward potential in our India consumer staples coverage universe.
Key risks
(1) Change in consumer preferences away from hair oil; (2) sustained input
cost pressure; and (3) slower-than-expected turnaround at Kaya.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
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