Marico - Input cost inflation hurts margins. Retain ADD :: Kotak Sec

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Marico (MRCO)
Consumer products
Input cost inflation hurts margins. Marico reported sales growth of 13% led by 10%
volume growth in Parachute and 18% in Saffola. Timing mismatch between input cost
inflation and price hike led to contraction in gross margin by ~250 bps. The company
has taken price hikes in Parachute (+5%) and Saffola (+5%) in August and September,
the impact of which will likely be seen in 3QFY11E. International business performed
well and Kaya is likely seeing a turnaround with the Derma Rx acquisition. Retain ADD.


Timing difference between input cost inflation and price hikes hurts margins
Marico reported consolidated net sales of Rs7.8 bn (+13%, KIE estimate Rs8.2 bn), EBITDA of
Rs1.1 bn (+0%, KIE estimate Rs1.3 bn) and PAT of Rs815 mn (-2%, KIE estimate Rs898 mn).
Overall sales growth during the quarter was led by 15% underlying volume growth. Key brands
Parachute (rigid packs) and Saffola grew by 10% and 18% in volume terms, respectively. Timing
mismatch between input cost inflation and price hike led to contraction in gross margin by ~250
bps. However, impact on EBITDA margin was limited to ~175 bps due to lower adspends (on the
back of higher base and shift in Kaya advertising to mass media). During the quarter, the company
made excise provision of Rs82 mn which we have accounted for as an extraordinary item.
Key takeaways from the results, conference call and our views
􀁠 Coconut oil – Parachute coconut oil (rigid packs) reported10% volume growth in 2QFY11. The
company took weighted average price hike of ~5% in August 2010 and proposes to take
another 7% price hike in November 2010 to manage the 15% inflation in copra prices in
1HFY11. We continue to be positive on the coconut oil business led by (1) increasing conversion
from loose oil to branded coconut oil, (2) introduction of low-unit packs to drive rural growth,
and (3) promoting Nihar in price-sensitive regions to counter low-price competition.
􀁠 Edible oil – Marico has effected a price increase of ~5% in the edible oil portfolio in
September and October 2010. Price hike was taken to offset the impact of higher cost of key
raw material—rice bran oil (+23% over 2QFY10). Prices of safflower oil declined by ~6% during
the quarter. We believe that Saffola is favorably placed to grow in high teens on the back of
rising income levels, growing awareness of cardiac-related health problems and opportunity for
penetration-led growth—(1) urban penetration of branded edible oils is 31% and rural
penetration is a low 9%, and (2) only~16% of households in India consume branded edible oils.