Marico Industries :Back to being a well-oiled machine: Nomura research

Back to being a well-oiled machine
Improving fundamentals into
FY14; new businesses to aid LT
growth. Upgrade to Buy

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Action: Performance to improve into FY14; upgrade to Buy
Over the past few quarters, Marico has underperformed the FMCG index,
as performance of its key brands Parachute and Saffola has lagged the LT
average. Its international business, too, has faced disruptions, but the
company foresees a more stable environment for the division ahead. We
believe Parachute will see a turnaround starting 1QFY14F on modest
price cuts, while improvement in Saffola will be visible in FY14 but more
measured. Focus will also likely turn to improving the profitability of its
international business, which should help to consolidate margins over the
next few years. New businesses (packaged foods + youth brands) are
growing at 20%-plus pa and are the likely long-term growth pillars for
Marico. However, we believe this turnaround is not built into current
valuations. Hence, we are turning buyers ahead of the improvement.
Catalysts: Pick-up in volume growth and low input prices
We see two catalysts for the stock over the next couple of quarters. First,
we expect a pick-up in volume growth over the next few quarters. Second
continuing stability in input costs should help to improve domestic
business margins. International business should also perform better going
forward, post the subdued performance of 4QFY13F.
Valuation: Trading at 23x FY15F P/E – below sector average
Marico trades at 23x FY15F EPS of INR 9.5, vs mid-cap peers such as
Dabur at 25x. We expect valuations to converge to the sector average
over the next few quarters. We see Marico as a solid long-term story in
India’s FMCG space, with exposure to mature segments (eg, hair oil) and
high-growth segments (eg, oats, muesli, deodorant, hair gel, etc).