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Marico (MRCO) has issued an information update detailing key near-term challenges.
While it remains confident of long-term growth prospects, host of factors, including a)
slowing consumer demand owing to macro challenges b) higher input costs c) need for
higher brand investments d) no improvement in MENA region e) change in accounting
methods in FY11 and f) currency volatility which could lead to near‐term
disappointment on earnings expectations, as per the management.
๔ Higher input costs can impact near‐term margins: While MRCO doesn’t view the
rising Copra prices as a structural concern as yet, it clearly outlines the need for
maintaining prices in order to protect volume growth. This can adversely impact the
margin in the near term. So far, MRCO has not seen any volume resistance in
Parachute despite ~32% price increase (Copra prices up 80% YoY), reflecting the
strong brand equity it enjoys.
๔ Ad spends unlikely to moderate: MRCO underscores the need to maintain
“worthwhile” ad-spends in order to support the new product introductions, which
can potentially impact margins in the near term. MENA region (5% of revenues)
hasn’t seen any improvement owing to political uncertainties prevailing in the
region. Additionally, price restrictions in those markets and recent currency volatility
can impact MRCO.
๔ Near‐term challenges, long‐term prospects attractive: We had downgraded the
stock, post Q1FY12 results, citing expensive valuations. While we like long-term
prospects of MRCO driven by its multiple-growth driver model and strong brand
dominance in key categories, expensive valuations and near-term challenges will
prevent meaningful outperformance. We revise our estimates further downwards by
~5-6% for FY12e and FY13e and maintain ‘Accumulate’, with TP of Rs150. Stock
trades at 30x FY12e and has outperformed markets by 22%/27%/40% in 3/6/12
months.
Key excerpts from the information update
On consumer demand
……..“This coupled with the 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”
On new product launches and impact on ad‐spends
……..“Such support for new products across businesses is crucial to the long
term sustenance of Marico’s growth plans. We believe that this investment
will be worthwhile, despite the possibility that as a result margin percentages
may vary from quarter to quarter”
On copra price inflation
……..“Thus, it is still unclear whether the Copra bull‐run denotes a structural
upward shift in copra prices. Any structural change is just a possibility at this
moment, but if it does materialize, we may not see a major improvement in
our margins until we reset the rules of the game”
On price increase
……..“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. Also, there are some unconfirmed signs that factors like
inflation, especially in food items and higher consumer finance interest rates
may have already began affecting overall consumer demand in India. Against
this backdrop, we may not take any further increase in retail prices as it may
impact the volume growth numbers”
On international business and currency fluctuations
……..“The business ambience in the Middle East and North Africa (MENA)
region continues to be uncertain. There has been a virtual standstill in business
in some countries like Libya, Syria and Yemen….we have had issues like the
authorities in MENA region putting restrictions on companies to take the retail
prices up to completely cover for cost push”
……..“There have been fluctuations in some of the other key currencies that
Marico deals with. This could lead to a variation in the reported growth of
operations in International geographies, as on consolidation of subsidiary
accounts there will be a gain / loss while converting global numbers to Indian
Rupees”
On earnings expectations of the street
……..“On balance, we sense that the numbers expected from us by Financial
Community members, especially Stock Market participants, are somewhat
excessive. We must therefore point out that on account of the various factors
outlined in this Update, there is a possibility of our Profit after Tax (PAT) for
the next couple of quarters falling short of the current expectations of market
participants particularly our investors and stock analysts”
On long‐term prospects
……..“Our belief in the long‐term potential of our businesses continues to be
strong. Our belief stands bolstered by the recent record of strong volume
growths across categories despite price hikes…..Also, the adverse impact of
some of the factors mentioned in this update above is expected to
progressively reduce as we move further into FY 12 and FY 13. It will therefore
be advisable to observe the situation for a couple of quarters, before
concluding on the shape of things to come”
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Marico (MRCO) has issued an information update detailing key near-term challenges.
While it remains confident of long-term growth prospects, host of factors, including a)
slowing consumer demand owing to macro challenges b) higher input costs c) need for
higher brand investments d) no improvement in MENA region e) change in accounting
methods in FY11 and f) currency volatility which could lead to near‐term
disappointment on earnings expectations, as per the management.
๔ Higher input costs can impact near‐term margins: While MRCO doesn’t view the
rising Copra prices as a structural concern as yet, it clearly outlines the need for
maintaining prices in order to protect volume growth. This can adversely impact the
margin in the near term. So far, MRCO has not seen any volume resistance in
Parachute despite ~32% price increase (Copra prices up 80% YoY), reflecting the
strong brand equity it enjoys.
๔ Ad spends unlikely to moderate: MRCO underscores the need to maintain
“worthwhile” ad-spends in order to support the new product introductions, which
can potentially impact margins in the near term. MENA region (5% of revenues)
hasn’t seen any improvement owing to political uncertainties prevailing in the
region. Additionally, price restrictions in those markets and recent currency volatility
can impact MRCO.
๔ Near‐term challenges, long‐term prospects attractive: We had downgraded the
stock, post Q1FY12 results, citing expensive valuations. While we like long-term
prospects of MRCO driven by its multiple-growth driver model and strong brand
dominance in key categories, expensive valuations and near-term challenges will
prevent meaningful outperformance. We revise our estimates further downwards by
~5-6% for FY12e and FY13e and maintain ‘Accumulate’, with TP of Rs150. Stock
trades at 30x FY12e and has outperformed markets by 22%/27%/40% in 3/6/12
months.
Key excerpts from the information update
On consumer demand
……..“This coupled with the 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”
On new product launches and impact on ad‐spends
……..“Such support for new products across businesses is crucial to the long
term sustenance of Marico’s growth plans. We believe that this investment
will be worthwhile, despite the possibility that as a result margin percentages
may vary from quarter to quarter”
On copra price inflation
……..“Thus, it is still unclear whether the Copra bull‐run denotes a structural
upward shift in copra prices. Any structural change is just a possibility at this
moment, but if it does materialize, we may not see a major improvement in
our margins until we reset the rules of the game”
On price increase
……..“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. Also, there are some unconfirmed signs that factors like
inflation, especially in food items and higher consumer finance interest rates
may have already began affecting overall consumer demand in India. Against
this backdrop, we may not take any further increase in retail prices as it may
impact the volume growth numbers”
On international business and currency fluctuations
……..“The business ambience in the Middle East and North Africa (MENA)
region continues to be uncertain. There has been a virtual standstill in business
in some countries like Libya, Syria and Yemen….we have had issues like the
authorities in MENA region putting restrictions on companies to take the retail
prices up to completely cover for cost push”
……..“There have been fluctuations in some of the other key currencies that
Marico deals with. This could lead to a variation in the reported growth of
operations in International geographies, as on consolidation of subsidiary
accounts there will be a gain / loss while converting global numbers to Indian
Rupees”
On earnings expectations of the street
……..“On balance, we sense that the numbers expected from us by Financial
Community members, especially Stock Market participants, are somewhat
excessive. We must therefore point out that on account of the various factors
outlined in this Update, there is a possibility of our Profit after Tax (PAT) for
the next couple of quarters falling short of the current expectations of market
participants particularly our investors and stock analysts”
On long‐term prospects
……..“Our belief in the long‐term potential of our businesses continues to be
strong. Our belief stands bolstered by the recent record of strong volume
growths across categories despite price hikes…..Also, the adverse impact of
some of the factors mentioned in this update above is expected to
progressively reduce as we move further into FY 12 and FY 13. It will therefore
be advisable to observe the situation for a couple of quarters, before
concluding on the shape of things to come”
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