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Marico (CMP Rs151, TP Rs144, Reco- REDUCE with a downside 5%)
Investment Rationale
Marico's 29% sales growth in H1FY12 is not sustainable in our opinion. Marico has
already taken sharp price hike on Parachute which limits the scope of further price
hike. Parachute volume growth at ~17% during H1FY12 was ahead of our expectation
and we expect it to taper down.
We believe softening of input prices would be set off by higher A&P spend. New product
launches and requirement of higher marketing efforts in the international business
would force Marico to escalate A&P (% of sales) spending by 200-250bps going forward
from 9.7% in H1FY12.
Slower growth in depreciation and interest cost would translate ~19% EBITDA CAGR
into ~22% net earnings CAGR during FY11-14E.
VALUATIONS AND RECOMMENDATION
On account of limited product portfolio, higher exposure to commodity prices and moderate
scope for further price hike on key brands, we maintain Marico's P/E discount over FMCG
sector. We retain our 24x multiple on 12-month forward earnings and raise TP to Rs144
(earlier Rs141). We maintain our 'REDUCE' rating on the stock.
Fairly Valued
Marico clocked robust sales growth of 29% during H1FY12 driven by strong
sales growth in Parachute hair oil which witnessed a sharp price hike along
with above expected volume growth. However, we don't expect such high
growth in Parachute hair oil to sustain going forward due to limited scope
of price growth.
Besides, we expect softening of input prices would help in improving gross
level profitability which would be set off by higher A&P spending for the
new launches and development of international business. We expect EBITDA
margin would be capped at ~13%.
Slower growth in depreciation and lower interest burden on repayment of
debt would translate ~19% EBITDA CAGR into ~22% net earnings CAGR
during FY11-14E.
Robust H1FY12 sales growth unsustainable
Marico's 29% sales growth in H1FY12 is not sustainable in our opinion. Marico
has already taken sharp price hike on Parachute which limits the scope of further
price hike. Parachute volume growth at ~17% during H1FY12 was ahead of our
expectation and we expect it to taper down.
Softening of input prices would be set off by higher A&P spend
Marico guided higher A&P spending for new product launches and requirement of
higher marketing efforts in the international business. It would force Marico to
escalate A&P (% of sales) spending by 200-250bps going forward from 9.7% in
H1FY12.
Slower growth in depreciation and interest cost
Marico plans for ~Rs2bn capex over the next three years which includes ~Rs1bn
capex during FY12. Besides, the company also plans to repay half of its foreign
currency loans over the next 12 months. Factoring these guidance, we see slower
growth in depreciation cost and decline in interest burden. This would help net
earnings to grow faster than EBITDA growth.
VALUATIONS AND RECOMMENDATION
On account of limited product portfolio, higher exposure to commodity prices and
moderate scope for further price hike on key brands, we maintain Marico's P/E
discount over FMCG sector. We retain our 24x multiple on 12-month forward earnings
and raise TP to Rs144 (earlier Rs141). We maintain our ‘REDUCE’ rating on the
stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Marico (CMP Rs151, TP Rs144, Reco- REDUCE with a downside 5%)
Investment Rationale
Marico's 29% sales growth in H1FY12 is not sustainable in our opinion. Marico has
already taken sharp price hike on Parachute which limits the scope of further price
hike. Parachute volume growth at ~17% during H1FY12 was ahead of our expectation
and we expect it to taper down.
We believe softening of input prices would be set off by higher A&P spend. New product
launches and requirement of higher marketing efforts in the international business
would force Marico to escalate A&P (% of sales) spending by 200-250bps going forward
from 9.7% in H1FY12.
Slower growth in depreciation and interest cost would translate ~19% EBITDA CAGR
into ~22% net earnings CAGR during FY11-14E.
VALUATIONS AND RECOMMENDATION
On account of limited product portfolio, higher exposure to commodity prices and moderate
scope for further price hike on key brands, we maintain Marico's P/E discount over FMCG
sector. We retain our 24x multiple on 12-month forward earnings and raise TP to Rs144
(earlier Rs141). We maintain our 'REDUCE' rating on the stock.
Fairly Valued
Marico clocked robust sales growth of 29% during H1FY12 driven by strong
sales growth in Parachute hair oil which witnessed a sharp price hike along
with above expected volume growth. However, we don't expect such high
growth in Parachute hair oil to sustain going forward due to limited scope
of price growth.
Besides, we expect softening of input prices would help in improving gross
level profitability which would be set off by higher A&P spending for the
new launches and development of international business. We expect EBITDA
margin would be capped at ~13%.
Slower growth in depreciation and lower interest burden on repayment of
debt would translate ~19% EBITDA CAGR into ~22% net earnings CAGR
during FY11-14E.
Robust H1FY12 sales growth unsustainable
Marico's 29% sales growth in H1FY12 is not sustainable in our opinion. Marico
has already taken sharp price hike on Parachute which limits the scope of further
price hike. Parachute volume growth at ~17% during H1FY12 was ahead of our
expectation and we expect it to taper down.
Softening of input prices would be set off by higher A&P spend
Marico guided higher A&P spending for new product launches and requirement of
higher marketing efforts in the international business. It would force Marico to
escalate A&P (% of sales) spending by 200-250bps going forward from 9.7% in
H1FY12.
Slower growth in depreciation and interest cost
Marico plans for ~Rs2bn capex over the next three years which includes ~Rs1bn
capex during FY12. Besides, the company also plans to repay half of its foreign
currency loans over the next 12 months. Factoring these guidance, we see slower
growth in depreciation cost and decline in interest burden. This would help net
earnings to grow faster than EBITDA growth.
VALUATIONS AND RECOMMENDATION
On account of limited product portfolio, higher exposure to commodity prices and
moderate scope for further price hike on key brands, we maintain Marico's P/E
discount over FMCG sector. We retain our 24x multiple on 12-month forward earnings
and raise TP to Rs144 (earlier Rs141). We maintain our ‘REDUCE’ rating on the
stock.
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