Marico - Leap into high growth category; event update; Buy :: Edelweiss (pdf link)

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Marico (MRCO IN, INR 165, Buy)

Marico announced 100% acquisition of Paras Personal Care Business (sales for FY12E: INR1.5bn) for an undisclosed consideration. This would give Marico access to brands like Set Wet, Livon and Zatak, ranked amongst top three in respective categories. Acquisition of this business is likely to further reduce Marico’s dependence on edibles oils and hair oils besides giving it an opportunity to participate in the rapidly growing categories in India. We reiterate ‘BUY’ on the stock.

Acquisition to broaden product portfolio

The acquisition has too an extent alleviated distributor’s concern over Marico’s narrow product portfolio. This will also lessen Marico’s dependence on edible oils and hair oils by contributing ~4% of Marico’s sales. The company will leverage its vast distribution strength to provide an impetus to the growth of these brands. Marico plans to focus more on fast growing hair gels, male deodorant and leave-on hair serum categories (blended growth rate: 20%). The company is confident to retain the high growth rate.

Valuation seen as high as 4-5x sales

Reckitt’s acquisition of the erstwhile Paras Pharma was valued at around ~7-8x sales. However, personal care business being a lower margin and high competition business, the valuation is likely to be lower. Yet, the valuation could be as high as 4-5x sales as in India, valuations in general tend to be higher. Thereby deal to be EPS dilutive in the first year. The company expects 2-3 months to complete the transaction.

Outlook and valuations: Positive; maintain ‘BUY’

Marico’s last acquisition was the Vietnam based company, ICP with revenue of INR1500mn and valued at ~1x sales. Paras personal care business will provide an immense growth opportunity and higher profitability. The stock is trading at 25.5x and 21.0x FY12E and FY13E EPS respectively. We recommend ‘BUY/Sector Outperformer’ on the stock.

Marico - Leap into high growth category; event update; Buy