Sustainable volume growth; margin shrinks • Marico :: ICICI Securities, PDF link

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Sustainable volume growth; margin shrinks
• Marico’s Q2FY15 results were in line with our estimate on the sales
front. However, they were lower than our estimates on the margins
as well as earnings front with sales witnessing strong 28.1% growth
led by 8% domestic volume growth
• Volume growth in Parachute, Saffola and value added hair oils stood
at 7%, 9% and 13%, respectively
• Operating margins in the quarter dipped 142 bps to 13.6% mainly on
account of sustained high inflation in copra prices, which have seen a
107% YoY increase. Lower operating margins led to moderate
earnings growth of 11.7% to | 118.3 crore
Brand strength aids in reviving volume growth
Led by Marico’s strong brand equity, the company’s volume growth
across its key product portfolio, Parachute coconut oil rigid packs (23% of
sales), Saffola refined oil (15% of sales) and value added hair oils (18% of
sales) remained high at 9-11%, ~15% and ~20%, respectively, in FY08-
12. From Q3FY13 onwards, Marico’s volume growth was witnessing
constant stress led by a slowdown in consumption demand in the
economy and a steep decline in urban discretionary demand. As Marico’s
portfolio is largely urban centric (~70% of sales), the company’s volume
growth across these brands, Parachute, Saffola and value added hair oils
(VAHO), dipped to ~2%, ~9%, and ~13%, respectively, during 9MFY14.
From Q4FY14, however, volume growth finally started witnessing an
uptick with growth in H1FY15 for Parachute and Saffola at 6% and 10%,
respectively, following the company’s sustained marketing initiatives and
expansion in rural India. Volume growth for VAHO has also started
witnessing traction at 12% in H1FY15 compared to 5% in Q4FY14. We
believe that a revival in discretionary demand and improving economic
scenario would further drive growth for VAHO by H2FY15E.
Gaining strength in higher growth categories
Led by Marico’s strong brand equity in its two flagship brands, Parachute
(associated with nourishment and purity) and Saffola (associated with
health and wellness), the company has successfully extended its brands
into higher growth and underpenetrated categories of advanced/value
added hair oils (Parachute Advansed), body lotions (Parachute body
lotion) and breakfast cereals (Saffola Oats, Masala oats and muesli).
Further, the company’s acquisition of youth brands, Set Wet & Zatak
(deodorants) and Livon (hair care) provide it a platform to grow in the
segments of future through already established brand equity. Marico has
also extended its brand equity of Livon to enter the hair colour segment
that is experiencing robust growth in India. Hence, we believe that led by
Marico’s strong brand strength and entry into higher growth segments,
revenue and volume growth would remain strong through FY16-17E.
Earnings to grow at 19.5% CAGR; maintain BUY
Marico has the ability to drive healthy sales growth at 20% CAGR (FY14-
17E) aided by expansion into rural areas and on capturing the revival in
urban growth through its strong brands. Further, with increasing
contribution of health and wellness products, youth brands and stabilising
operations in the international business, we expect margins to improve to
16.4% by FY17E, driving profitability growth at 19.5% CAGR in FY14-17E.
We value the stock at 28x FY17E EPS of | 12.8 and assign the stock a
target price of | 367 with a BUY recommendation.

LINK
http://content.icicidirect.com/mailimages/IDirect_Marico_Q2FY15.pdf