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Marico posted mix set of numbers for 3QFY2011. Overall volume growth of a
strong 15%, coupled with price hike of ~5% and ~8% taken in close succession
resulted in top-line growth of ~22% yoy (in line with our estimates). However,
earnings grew a modest 11.8% yoy despite lower tax rate and higher other
income, impacted by significant margin contraction. We downgrade the stock
from Accumulate to Reduce.
Earnings impacted by high input costs: Marico posted steady top-line growth of
~22% yoy to `817.7cr led by both volume and value growth. Its core brands,
Parachute and Saffola, posted volume growth of 5% and 13%, respectively. Kaya
grew 40% yoy (including Derma Rx) and 11% yoy (excluding Derma Rx) with
declining sequential losses in standalone Kaya. The international business
continued its steady growth momentum moving up 33% yoy. However, earnings
grew at a modest 11.8% yoy, despite lower tax rate and higher other income,
impacted by the unrelenting copra prices (up ~62% yoy).
Outlook and Valuation: Post the 3QFY2011 results, we have revised our estimates
downwards: 1) revised revenue by ~2% to factor in – a) we believe there is high
risk of down-trading for Marico as consumers shift to lower price/loose coconut
oil variants, which will impact its sales volume in 4Q, and b) management would
have to resort to price cuts post the cyclical downturn of the raw material inflation
to re-capture lost volumes, which will impact revenues in FY2012. Nonetheless,
we factor in ~15% yoy growth in revenues over FY2011-12, 2) earnings revised
by 9-18% to factor in 25-60% yoy inflation in rice bran oil and copra prices,
which were higher than anticipated. Hence, we downgrade the stock from
Accumulate to Reduce, with a Target Price of `119 (`136) based on 23x revised
FY2012E EPS of `5.2 (`5.7).
Marico’s international business continued to post steady growth of 33% yoy in
constant currency terms (29% yoy reported growth adjusted for rupee
appreciation). Kaya solutions business posted strong growth of 40% yoy to `62cr
with declining sequential losses in standalone Kaya.
Earnings impacted by significant margin contraction
In terms of earnings, Marico posted a growth of 11.8% yoy to `69.5cr (`62.2),
below our estimates and largely aided by a 283bp decline in the tax rate due to
production at manufacturing facilities situated in tax free zones along with higher
other income, which rose 22% yoy. Management has guided for an effective tax
rate of ~16% in FY2011 and ~20% in FY2012.
OPM down by 257bp yoy as gross margins contract by 515bp yoy
Marico witnessed yoy contraction in gross margin by 257bp as the copra, rice bran
oil, safflower oil and HDPE prices inched higher by 62%, 25%, 3% and 4%,
respectively. Management was able to maintain operating profit at last year levels,
by reducing other operating costs, which saw ad-spend (down 163bp yoy), other
expenses (down 67bp yoy) decline. While Kaya’s ad-spends are being kept low,
with a change in the strategy to focus on press and digital media instead of
television advertising, other expenses are being reined through lower provisioning
for excise duty at ~75% to `9.6cr (~100% done in 3QFY2010 to `11cr).
Growth in core brands muted on account of steep price hikes
Parachute coconut oil in rigid packs recorded volume growth of ~5% yoy on a high
base (discounts and offers running in 3QFY2010). The volume growth came in low,
impacted by price hikes of ~5% and ~8% taken in close succession takrecently
resulting in a cumulative ~24% weighted average price hike taken this far.
The Saffola franchise registered volume growth of 13% yoy and overall value growth
of ~24% yoy, aided partially by increase in prices in select SKUs. In terms of input
costs, while safflower oil price witnessed a spike of ~25%, rice bran oil prices
trended lower by ~3% during the quarter. Management maintained its guidance for
Saffola Oats and Saffola Arise, expecting a cumulative growth in revenue to
~`40–45cr in FY2011.
Hair oil volumes grow 31%, plans to enter cooling oils on track
During the quarter, all hair oils brands of Marico recorded healthy growth with hair
oils portfolio in rigid packs registering ~31% yoy growth led by pre-festive sales. The
prototyping of Parachute hair oil in Andhra Pradesh has been received well. Most of
the hair oil variants registered growth of ~20% and the combined market share has
grown YTD by 140bp to 22.8%.
International business registers strong 33% growth
International FMCG business grew a strong 33% yoy (28% yoy adjusted for currency
movement) during the quarter led by 25% volume growth and 8% price-led growth. It
now constitutes ~23% of the group turnover.
In Bangladesh, Parachute commanded volume share of ~70% during the quarter.
Top-line was supported by price hikes similar to India, but with a lag effect. Hair dye
code established itself as the second largest hair dye brand in Bangladesh with
market share of ~25%. The launch of Saffola in 1QFY2011 has seen positive
response and is expected to grow at a healthy pace. In the Middle East, both
Parachute Cream and Parachute Gold hair oil recorded healthy growth. Marico’s
business in Egypt continued to post steady growth and maintained its market share at
~57%. In GCC countries, Parachute cream maintained its leadership position with a
market share of ~27%. South Africa registered robust growth of ~30% yoy driven by
strong growth across brands. Integration of the recently acquired OTC healthcare
brand, Ingwe, in South Africa and Code 10 in Malaysia is on track. While including
Ingwe, South Africa’s portfolio increased by ~45% yoy, Code 10 registered a growth
of ~30% on the back of brand renewal efforts and distribution gains.
Kaya showing signs of revival, cuts losses
Kaya posted revenue growth of ~40% during the quarter led by the acquisition of
Derma Rx. The revenue growth (ex. Derma Rx) stood at healthy 11% yoy, with the
same clinic stores growing by ~8%. During the quarter, Kaya India incurred a loss of
`0.9cr (loss of `3.5cr in 2QFY2011), aided by low advertising and promotion (A&P)
spend. Kaya consolidated reported operating profit of `4.1cr. During the quarter,
Kaya opened a new clinic in Middle East and management has indicated
introduction of products from Derma Rx in the Middle East by 4QFY2011. Derma Rx
products were introduced in India during the quarter.
Investment Concerns
Volumes in a downtrend, expect revenues to take a hit: We expect Marico to post
lower volumes in its core brands in 4QFY2011 on account of down-trading to
lower price/ loose coconut oil variants as consumers feel the pinch of rising food
inflation. Moreover, post the flush season (in Tamil Nadu, Feb-April) when the
raw material inflation cycle reverses its trends (as mentioned by management in
the result con-call), we expect Marico to resort to price cuts to garner lost
volumes, which will impact value growth and hence we have pruned our revenue
estimates by ~2% for FY2011 and FY2012. Nonetheless, we expect ~15% yoy
growth in revenues for FY2011–12.
International business well on track, however domestic business on shaky wicket:
Marico has reported India consumer business growth at ~19% with growth from
rural consumers at 28% yoy, while the urban growth rate plateaus at ~17%. The
rising copra and palm oil prices are expected to hit the consumers buying power
in rural India (rural contribution at ~27% to overall revenues) owing to which we
expect lower rural contribution to overall revenues. On the other hand, the
company’s international business is well on track with all geographies reporting
strong numbers. We have modeled 11% and 26% CAGR in domestic and
international businesses over FY2010-12, respectively. However, we do not
expect the raw material inflation to cool down significantly and hence have
pruned our margin estimates for FY2011 and FY2012 by 180bp and 75bp,
respectively.
Outlook and Valuation
We expect 4QFY2011 to be a better quarter aided by the recent price hikes in
Parachute, improving profitability in the international business, better performance by
Kaya and lower tax rate. However, headwinds of down-trading and margin
pressures due to raw material inflation are likely to persist. At the CMP of `128, the
stock is trading at 24.7x FY2012E earnings i.e. at 7-8% premium to its historical
valuations). Hence, we downgrade the stock from Accumulate to Reduce, with a
Target Price of `119 (`136) based on 23x revised FY2012E EPS of `5.2 (`5.7).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Marico – 3QFY2011 Result Update
Angel Broking downgrades Marico from Accumulate to Reduce with a Target Price of Rs. 119.
Marico posted mix set of numbers for 3QFY2011. Overall volume growth of a
strong 15%, coupled with price hike of ~5% and ~8% taken in close succession
resulted in top-line growth of ~22% yoy (in line with our estimates). However,
earnings grew a modest 11.8% yoy despite lower tax rate and higher other
income, impacted by significant margin contraction. We downgrade the stock
from Accumulate to Reduce.
Earnings impacted by high input costs: Marico posted steady top-line growth of
~22% yoy to `817.7cr led by both volume and value growth. Its core brands,
Parachute and Saffola, posted volume growth of 5% and 13%, respectively. Kaya
grew 40% yoy (including Derma Rx) and 11% yoy (excluding Derma Rx) with
declining sequential losses in standalone Kaya. The international business
continued its steady growth momentum moving up 33% yoy. However, earnings
grew at a modest 11.8% yoy, despite lower tax rate and higher other income,
impacted by the unrelenting copra prices (up ~62% yoy).
Outlook and Valuation: Post the 3QFY2011 results, we have revised our estimates
downwards: 1) revised revenue by ~2% to factor in – a) we believe there is high
risk of down-trading for Marico as consumers shift to lower price/loose coconut
oil variants, which will impact its sales volume in 4Q, and b) management would
have to resort to price cuts post the cyclical downturn of the raw material inflation
to re-capture lost volumes, which will impact revenues in FY2012. Nonetheless,
we factor in ~15% yoy growth in revenues over FY2011-12, 2) earnings revised
by 9-18% to factor in 25-60% yoy inflation in rice bran oil and copra prices,
which were higher than anticipated. Hence, we downgrade the stock from
Accumulate to Reduce, with a Target Price of `119 (`136) based on 23x revised
FY2012E EPS of `5.2 (`5.7).
Parachute volume low at ~5%, Saffola manages double-digit growth
Marico reported top-line growth of 22.1% yoy to `817.7cr (`669.6cr) in line with
our estimates and driven by both volume and value growth. While overall volume
growth stood at ~15%, with core brands Parachute (rigids) and Saffola posting
volume growth of 5% and 13% respectively, for the quarter, value growth was a
function of the price hike of ~5% and ~8% taken in close succession recently.
Marico has this far taken a weighted average price hike of ~24% (including the
recent 7-8% price hike taken in Parachute, which would reflect in 4Q). We believe
that the price hikes taken so far have been very steep and with the copra prices
showing no sign of cooling, further price hikes in the future cannot be ruled out.
While there are no concerns about Parachute maintaining its leadership position
and Marico’s ability to pass on the increase in raw material prices, we would
remain cautious. We believe that the volumes would be impacted going forward as
consumers shift to low price/loose coconut oil variants due to absence of stickiness
in this product segment.
Marico’s international business continued to post steady growth of 33% yoy in
constant currency terms (29% yoy reported growth adjusted for rupee
appreciation). Kaya solutions business posted strong growth of 40% yoy to `62cr
with declining sequential losses in standalone Kaya.
Earnings impacted by significant margin contraction
In terms of earnings, Marico posted a growth of 11.8% yoy to `69.5cr (`62.2),
below our estimates and largely aided by a 283bp decline in the tax rate due to
production at manufacturing facilities situated in tax free zones along with higher
other income, which rose 22% yoy. Management has guided for an effective tax
rate of ~16% in FY2011 and ~20% in FY2012.
OPM down by 257bp yoy as gross margins contract by 515bp yoy
Marico witnessed yoy contraction in gross margin by 257bp as the copra, rice bran
oil, safflower oil and HDPE prices inched higher by 62%, 25%, 3% and 4%,
respectively. Management was able to maintain operating profit at last year levels,
by reducing other operating costs, which saw ad-spend (down 163bp yoy), other
expenses (down 67bp yoy) decline. While Kaya’s ad-spends are being kept low,
with a change in the strategy to focus on press and digital media instead of
television advertising, other expenses are being reined through lower provisioning
for excise duty at ~75% to `9.6cr (~100% done in 3QFY2010 to `11cr).
Growth in core brands muted on account of steep price hikes
Parachute coconut oil in rigid packs recorded volume growth of ~5% yoy on a high
base (discounts and offers running in 3QFY2010). The volume growth came in low,
impacted by price hikes of ~5% and ~8% taken in close succession takrecently
resulting in a cumulative ~24% weighted average price hike taken this far.
The Saffola franchise registered volume growth of 13% yoy and overall value growth
of ~24% yoy, aided partially by increase in prices in select SKUs. In terms of input
costs, while safflower oil price witnessed a spike of ~25%, rice bran oil prices
trended lower by ~3% during the quarter. Management maintained its guidance for
Saffola Oats and Saffola Arise, expecting a cumulative growth in revenue to
~`40–45cr in FY2011.
Hair oil volumes grow 31%, plans to enter cooling oils on track
During the quarter, all hair oils brands of Marico recorded healthy growth with hair
oils portfolio in rigid packs registering ~31% yoy growth led by pre-festive sales. The
prototyping of Parachute hair oil in Andhra Pradesh has been received well. Most of
the hair oil variants registered growth of ~20% and the combined market share has
grown YTD by 140bp to 22.8%.
International business registers strong 33% growth
International FMCG business grew a strong 33% yoy (28% yoy adjusted for currency
movement) during the quarter led by 25% volume growth and 8% price-led growth. It
now constitutes ~23% of the group turnover.
In Bangladesh, Parachute commanded volume share of ~70% during the quarter.
Top-line was supported by price hikes similar to India, but with a lag effect. Hair dye
code established itself as the second largest hair dye brand in Bangladesh with
market share of ~25%. The launch of Saffola in 1QFY2011 has seen positive
response and is expected to grow at a healthy pace. In the Middle East, both
Parachute Cream and Parachute Gold hair oil recorded healthy growth. Marico’s
business in Egypt continued to post steady growth and maintained its market share at
~57%. In GCC countries, Parachute cream maintained its leadership position with a
market share of ~27%. South Africa registered robust growth of ~30% yoy driven by
strong growth across brands. Integration of the recently acquired OTC healthcare
brand, Ingwe, in South Africa and Code 10 in Malaysia is on track. While including
Ingwe, South Africa’s portfolio increased by ~45% yoy, Code 10 registered a growth
of ~30% on the back of brand renewal efforts and distribution gains.
Kaya showing signs of revival, cuts losses
Kaya posted revenue growth of ~40% during the quarter led by the acquisition of
Derma Rx. The revenue growth (ex. Derma Rx) stood at healthy 11% yoy, with the
same clinic stores growing by ~8%. During the quarter, Kaya India incurred a loss of
`0.9cr (loss of `3.5cr in 2QFY2011), aided by low advertising and promotion (A&P)
spend. Kaya consolidated reported operating profit of `4.1cr. During the quarter,
Kaya opened a new clinic in Middle East and management has indicated
introduction of products from Derma Rx in the Middle East by 4QFY2011. Derma Rx
products were introduced in India during the quarter.
Investment Concerns
Volumes in a downtrend, expect revenues to take a hit: We expect Marico to post
lower volumes in its core brands in 4QFY2011 on account of down-trading to
lower price/ loose coconut oil variants as consumers feel the pinch of rising food
inflation. Moreover, post the flush season (in Tamil Nadu, Feb-April) when the
raw material inflation cycle reverses its trends (as mentioned by management in
the result con-call), we expect Marico to resort to price cuts to garner lost
volumes, which will impact value growth and hence we have pruned our revenue
estimates by ~2% for FY2011 and FY2012. Nonetheless, we expect ~15% yoy
growth in revenues for FY2011–12.
International business well on track, however domestic business on shaky wicket:
Marico has reported India consumer business growth at ~19% with growth from
rural consumers at 28% yoy, while the urban growth rate plateaus at ~17%. The
rising copra and palm oil prices are expected to hit the consumers buying power
in rural India (rural contribution at ~27% to overall revenues) owing to which we
expect lower rural contribution to overall revenues. On the other hand, the
company’s international business is well on track with all geographies reporting
strong numbers. We have modeled 11% and 26% CAGR in domestic and
international businesses over FY2010-12, respectively. However, we do not
expect the raw material inflation to cool down significantly and hence have
pruned our margin estimates for FY2011 and FY2012 by 180bp and 75bp,
respectively.
Outlook and Valuation
We expect 4QFY2011 to be a better quarter aided by the recent price hikes in
Parachute, improving profitability in the international business, better performance by
Kaya and lower tax rate. However, headwinds of down-trading and margin
pressures due to raw material inflation are likely to persist. At the CMP of `128, the
stock is trading at 24.7x FY2012E earnings i.e. at 7-8% premium to its historical
valuations). Hence, we downgrade the stock from Accumulate to Reduce, with a
Target Price of `119 (`136) based on 23x revised FY2012E EPS of `5.2 (`5.7).
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