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Marico (MRCO)
Consumer products
Strong performance in core businesses. Marico’s 2QFY11 results were in line with
estimates. Highlights: (1) Parachute rigid packs and Saffola sales volume grew by 10%
and 15%, respectively, despite steep price increases, (2) gross margin declined 468 bps
to 45% as almost all its inputs were hyper-inflationary, (3) likely growth challenges in
Bangladesh (45% of international business) and (4) while quality of sales in Kaya
improved (higher product sales), overall 7% growth was disappointing. We continue to
believe that value-added hair oil is the next big opportunity for Marico. ADD.
No surprises; good volume growth, margins under pressure
Marico reported consolidated net sales of Rs9.74 bn, (+26%, KIE estimate Rs9.66 bn), EBITDA of
Rs1.16 bn (+9%, KIE estimate Rs1.17 bn) and reported PAT of Rs800 mn (+9%, KIE estimate
Rs825 mn). Key highlights:
Parachute rigid packs and Saffola sales volume grew 10% (including flexi pack, volume growth
in parachute is 6%) and 11% yoy, respectively. Parachute volume growth is commendable
given that it is on the back of pricing growth of ~30%. Like-to-like volume growth in Saffola is
higher at ~15% yoy to 2QFY11; there was reduction in promotional volumes on Saffola this
quarter. Volume growth in hair oil was strong at 26% yoy and overall value growth was 48%.
The international business grew 14% organically and 19% overall. Impact of forex movement
and accounting change in VAT in Bangladesh (MODVAT on materials was earlier accounted
under COGS and is now required to be reduced from sales to compute net sales) is 14%.
Geography wise, (1) in Bangladesh, it is leveraging the distribution network of Parachute and
has introduced Saffola, Hair Code dye and value added hair oil. Sales volume was flat on a yoy
basis (2) in the MENA region, the political and economic environment remained uncertain –
however, the company continued with its innovation pipeline and has launched hair oil and hair
cream under the Parachute brand. Its Bangladesh operations has likely reached a stage where
the necessity to diversify from coconut oil is high (having reached ~70% market share).
Kaya reported sales growth of 7% yoy to Rs662 mn and loss of Rs75 mn during the quarter.
Sale of products as a percentage of Kaya sales has clearly outperformed expectations—it stands
at 23% versus 16% in 2QFY11. The company is focusing on product sales as it will help
improve return ratios. Derma Rx products are in the process of being launched in Middle East.
After four quarters of growth, Derma Rx reported ~5% sales decline this quarter. The company
attributed a part of this to relocation of one of its key clinics in Singapore. The company
believes that it is better prepared in the Kaya business today than it was couple of years ago as
it is focused on (1) the cure-to-care positioning and (2) building a loyal customer base.
Gross margin during the quarter declined by 468bps to 45% due to the inflationary raw
material environment – though few input costs have started correcting, it continues to be
higher on yoy basis- copra +28% yoy, safflower oil +24% yoy, LLP +47% yoy, rice bran
+46% yoy.
Despite significant gross margin pressure, EBITDA margin decline was arrested at 186 bps
to 12% due to savings in adspends of 257 bps yoy. Staff cost and other expenditure was
almost flat yoy.
Gross debt as of September 30, 2011 is Rs7.3 bn (net debt Rs 4.3 bn) of which foreign
currency debt is Rs6.7 bn and the balance is Rupee debt. Pre-tax average cost of debt is
4.2%.
Takeaways from the concall
The value added hair oil market grew by ~15% in volume terms whereas Marico grew
ahead of the category growth at 26% during the quarter. According to the company, its
broad participative strategy (presence across all legs of the hair oil market with brands
such as Parachute Jasmine, Hair & Care, Shanti Amla), thrust on rural distribution,
disruptive pricing action (Shanti Amla is priced at ~25%discount to Dabur Amla) and
differentiated value proposition is likely aiding this growth trend. This is in line with our
view highlighted in the note dated July 27, 2011 “the good growth in newer segments of
value-added hair oils is not surprising as Indian consumer associates hair oil consumption
with nutrition and is looking for propositions-based products (key example is cooling oil,
anti-hairfall oil etc).”
Any change in copra price takes ~8 weeks to reflect in the cost for the company due to
inventory in hand. Copra price has been volatile over the past couple of months. In case
of a sustained price correction, the company would initiate price cuts in the recruiter
packs to start with.
The foods portfolio of the company is doing well and it expects to clock sales of ~Rs400
mn in the oats and rice portfolio together. In the former, it has ~10% market share and is
priced below the leader, Quaker. In rice, it is customizing its product based on regional
preferences.
Geography wise, the international business sales is split as follows – Bangladesh 45%,
MENA 25%, Vietnam 16%, South Africa 14%.
The company reaches 3.5 mn outlets with direct reach to 0.8 mn outlets. Its focus on
rural sales has increased the salience of this segment in the overall sales mix to 30%. As
highlighted in our note dated July 27, 2011, we expect continued outperformance of
rural channel for Marico’s sales.
Retain ADD
We like the unique ability demonstrated by Marico in (1) building a strong domestic
portfolio with good franchise value, (2) meaningfully differentiated offerings in the
portfolio, (3) good pricing power, (4) presence in niche segments, (5) good growth
opportunity in international markets and (6) successful inorganic growth track record.
Our earnings estimates are broadly maintained; retain ADD rating with target price of
Rs175 (valued at 26XFY2013E). Key risks are (1) higher-than-expected input cost
inflation, (2) exposure to currency risk and (3) lack of meaningful success in new
ventures.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Marico (MRCO)
Consumer products
Strong performance in core businesses. Marico’s 2QFY11 results were in line with
estimates. Highlights: (1) Parachute rigid packs and Saffola sales volume grew by 10%
and 15%, respectively, despite steep price increases, (2) gross margin declined 468 bps
to 45% as almost all its inputs were hyper-inflationary, (3) likely growth challenges in
Bangladesh (45% of international business) and (4) while quality of sales in Kaya
improved (higher product sales), overall 7% growth was disappointing. We continue to
believe that value-added hair oil is the next big opportunity for Marico. ADD.
No surprises; good volume growth, margins under pressure
Marico reported consolidated net sales of Rs9.74 bn, (+26%, KIE estimate Rs9.66 bn), EBITDA of
Rs1.16 bn (+9%, KIE estimate Rs1.17 bn) and reported PAT of Rs800 mn (+9%, KIE estimate
Rs825 mn). Key highlights:
Parachute rigid packs and Saffola sales volume grew 10% (including flexi pack, volume growth
in parachute is 6%) and 11% yoy, respectively. Parachute volume growth is commendable
given that it is on the back of pricing growth of ~30%. Like-to-like volume growth in Saffola is
higher at ~15% yoy to 2QFY11; there was reduction in promotional volumes on Saffola this
quarter. Volume growth in hair oil was strong at 26% yoy and overall value growth was 48%.
The international business grew 14% organically and 19% overall. Impact of forex movement
and accounting change in VAT in Bangladesh (MODVAT on materials was earlier accounted
under COGS and is now required to be reduced from sales to compute net sales) is 14%.
Geography wise, (1) in Bangladesh, it is leveraging the distribution network of Parachute and
has introduced Saffola, Hair Code dye and value added hair oil. Sales volume was flat on a yoy
basis (2) in the MENA region, the political and economic environment remained uncertain –
however, the company continued with its innovation pipeline and has launched hair oil and hair
cream under the Parachute brand. Its Bangladesh operations has likely reached a stage where
the necessity to diversify from coconut oil is high (having reached ~70% market share).
Kaya reported sales growth of 7% yoy to Rs662 mn and loss of Rs75 mn during the quarter.
Sale of products as a percentage of Kaya sales has clearly outperformed expectations—it stands
at 23% versus 16% in 2QFY11. The company is focusing on product sales as it will help
improve return ratios. Derma Rx products are in the process of being launched in Middle East.
After four quarters of growth, Derma Rx reported ~5% sales decline this quarter. The company
attributed a part of this to relocation of one of its key clinics in Singapore. The company
believes that it is better prepared in the Kaya business today than it was couple of years ago as
it is focused on (1) the cure-to-care positioning and (2) building a loyal customer base.
Gross margin during the quarter declined by 468bps to 45% due to the inflationary raw
material environment – though few input costs have started correcting, it continues to be
higher on yoy basis- copra +28% yoy, safflower oil +24% yoy, LLP +47% yoy, rice bran
+46% yoy.
Despite significant gross margin pressure, EBITDA margin decline was arrested at 186 bps
to 12% due to savings in adspends of 257 bps yoy. Staff cost and other expenditure was
almost flat yoy.
Gross debt as of September 30, 2011 is Rs7.3 bn (net debt Rs 4.3 bn) of which foreign
currency debt is Rs6.7 bn and the balance is Rupee debt. Pre-tax average cost of debt is
4.2%.
Takeaways from the concall
The value added hair oil market grew by ~15% in volume terms whereas Marico grew
ahead of the category growth at 26% during the quarter. According to the company, its
broad participative strategy (presence across all legs of the hair oil market with brands
such as Parachute Jasmine, Hair & Care, Shanti Amla), thrust on rural distribution,
disruptive pricing action (Shanti Amla is priced at ~25%discount to Dabur Amla) and
differentiated value proposition is likely aiding this growth trend. This is in line with our
view highlighted in the note dated July 27, 2011 “the good growth in newer segments of
value-added hair oils is not surprising as Indian consumer associates hair oil consumption
with nutrition and is looking for propositions-based products (key example is cooling oil,
anti-hairfall oil etc).”
Any change in copra price takes ~8 weeks to reflect in the cost for the company due to
inventory in hand. Copra price has been volatile over the past couple of months. In case
of a sustained price correction, the company would initiate price cuts in the recruiter
packs to start with.
The foods portfolio of the company is doing well and it expects to clock sales of ~Rs400
mn in the oats and rice portfolio together. In the former, it has ~10% market share and is
priced below the leader, Quaker. In rice, it is customizing its product based on regional
preferences.
Geography wise, the international business sales is split as follows – Bangladesh 45%,
MENA 25%, Vietnam 16%, South Africa 14%.
The company reaches 3.5 mn outlets with direct reach to 0.8 mn outlets. Its focus on
rural sales has increased the salience of this segment in the overall sales mix to 30%. As
highlighted in our note dated July 27, 2011, we expect continued outperformance of
rural channel for Marico’s sales.
Retain ADD
We like the unique ability demonstrated by Marico in (1) building a strong domestic
portfolio with good franchise value, (2) meaningfully differentiated offerings in the
portfolio, (3) good pricing power, (4) presence in niche segments, (5) good growth
opportunity in international markets and (6) successful inorganic growth track record.
Our earnings estimates are broadly maintained; retain ADD rating with target price of
Rs175 (valued at 26XFY2013E). Key risks are (1) higher-than-expected input cost
inflation, (2) exposure to currency risk and (3) lack of meaningful success in new
ventures.
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