Marico (MRCO.BO) Buy: Changing Business Mix Is Positive; Look Beyond A Quarter :Citi

 Mix shift within hair oils — Marico’s business profile is changing – dependence on
coconut oils reduces (~30% of revenues now vs. >40%, 5 yrs ago) as superior growth
& share gains across high margin segments emerge. Despite Marico’s entry into many
categories, the share of other hair oils has moved up (16% of revs vs. 13%, 5 yrs ago)
– and mgmt is confident of mid to high teens volume growth medium term, driven by
continued share gains, wider offering & distribution initiatives. We think other hair oils
will be >20% of consol revs by FY15E, which coupled with improving overseas/
personal care share buoys growth, profit mix & reduces impact of copra price volatility.

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 Lower Parachute / Saffola pricing makes sense; Don’t miss other price hikes —
Mgmt’s strategy to lower Parachute / Saffola recruiter pack ASPs (~2% wt avg) in an
attempt to normalize the price premium vs. unbranded / smaller players should ensure
that volumes move into double digits. Further, pricing will be supported by price hikes in
smaller brands like Parachute Advansed (+9%), hot oils (+9%) & jasmine oil (+5%).
 International recovery — After flat constant currency sales in FY13, we expect good
FY14 growth driven by an improvement in Bangladesh (4Q pickup should sustain with
better macro/new products) & as MENA recovers in 2H (corrective action taken around
packing changes / A&P). We think margins will consequently recover from ~7% last
year to ~10% in FY14E & further improve closer to co. avg. over medium term.
 Pullback – an opportunity — Recent concerns on moderating revenues (price cuts /
discounts), weak international sales & GMs tapering off (from the multi-year highs of
FY13) are adequately priced in with ~15% stock underperformance vs. peers in 6
months. The stock price pullback is an enhanced buying opportunity – expect a growth
pickup from 2HFY14 and est. a healthy ~22% EPS CAGR over FY13-15E.
 Beyond the Q — 1QFY14 growth will be modest, albeit on an exceptionally high base
(+45% PAT last yr). That said, besides the ~20-day strike impact in Maharashtra (LBT
issue), strategies to buoy volumes & relatively benign input costs should ensure steady
operational performance. Per mgmt, there is limited impact due to Uttarakhand floods.