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MRCO.BO, Marico Limited (Rs128.00) /Input Costs (Copra) at All- time High;
Maintain UW
Maintain Underweight. We continue to believe that it will be a challenge for Marico to improve
margins from F2010 levels. Sharp increases in input costs (copra) and a slowdown in organic
sales momentum will likely result in a deceleration in earnings growth in F2011. We expect
earnings progression to slow to 9% CAGR for F2010-13 from 31% in F2007-10e. We recommend
investors book profits and shift positions to Dabur (DABU.BO, Rs96, O).
What's new: Current copra prices (Marico’s key input) are at all-time highs, up ~80% YoY. If
prices remain at current levels, average copra prices for F2011 will be up 38% over F2010. For
perspective, Marico will need to take a weighted average price increase of ~25% on its Parachute
portfolio to maintain gross margin at ~50% (average of last three years). Marico effected a ~13%
price increase, and we expect another ~10-12% price hike in F3Q11. Even after this steep price
rise, gross margin for the key Parachute brand will likely decline by ~700bp YoY, in our view.
Where we differ: We believe that the product life cycle for hair oils in India may be close to its
peak. The pace of innovation in the category has slowed. We forecast F2010-13 revenue CAGR
of 8% in the core coconut oil business versus a F2002-10e CAGR of around 15% – there are
initial signs of slowdown with Parachute brand growing only 6% in F2Q11.
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