Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Marico Ltd
Strong brands = re-rating potential
Initiate coverage with a Buy rating
Marico is the leading coconut oil producer in India with strong brand equity for its
Parachute brand. The company is extending Saffola, its cooking oil brand into the
health food segment because of safflower’s (the main raw material) health
properties. Based on its strong brands and distribution leverage, and little
competition from multinational corporations (MNCs), we forecast an earnings
CAGR of 29% for FY11-13. We expect its PE to outperform the sector average,
resulting in a re-rating of the stock. At our price target of Rs160, Marico would trade at 27x
FY12E PE.
Parachute: significant growth opportunities
We believe Parachute (30% of total revenue) will remain the major earnings
contributor. We expect wider distribution and income growth in rural markets to
accelerate consumer uptrading, from generic to branded hair oil. Weakening copra
prices could be a key catalyst for share price performance, in our view.
Health foods, international business, Kaya = growth
We expect substantial growth opportunities for Marico, with its health foods
scaling up, Kaya (beauty and skincare clinics) in turnaround mode, and
international businesses likely to contribute faster growth in segments such as male
grooming in Egypt, Malaysia and Vietnam. Our model does not include the new
businesses, and hence earnings from these businesses would have a positive impact
on our forecasts.
Valuation: DCF-based price target of Rs160.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume 10.6% WACC.
Investment Thesis
We initiate coverage of Marico with a Buy rating and price target of Rs160.00
Marico has evolved from a pure coconut oil manufacturing company to a
diversified staples company that now has value-added oils, health foods, beauty
and skincare clinics (Kaya), international brands, and a dominant position in the
hair care segment in Bangladesh.
We believe Marico is well positioned to benefit from: 1) rising incomes in rural
India that are resulting in consumer uptrading from generic to branded hair and
edible oils; and 2) higher spending on health food, beauty therapies and male
grooming in urban India.
(1) We expect Marico’s new strategy will help it to dominate in the health food
segment, where Saffola (15% of sales) is the major brand. Marico was the
first to enter this food sub-segment. We expect health foods to grow rapidly
in urban India, where education, westernised lifestyles, and health
consciousness are resulting in healthier eating habits.
(2) In its core hair oil business, Marico has pricing premium as Parachute
(30% of sales) is the market leader. Due to the rising prosperity in rural
India, consumers are uptrading from generic to branded hair oil.
(3) The skincare Kaya business (7% of sales) should benefit from rising
disposable incomes in urban India. We expect the acquisition of Derma Rx
to result in a profitable over-the-counter (OTC) business within Kaya
clinics.
We believe Marico operates in categories where MNCs are unlikely to compete
and hence we are confident that growth rates and profitability will higher in the
near term—the key reasons for our higher-than-sector valuation.
Key catalysts
Softening copra prices: Copra, which comprises 40% of Marico’s raw
materials, is a domestic commodity, the price of which is linked to the agri-fuel
index and is dependent on domestic supply and demand. The price, which had
been rallying since October 2009, rising from Rs3,000/ton to Rs6,700/ton until
February 2011, has fallen recently to Rs5,800. Our sensitivity analysis suggests
a fall in the copra price would yield higher margins and a re-rating of Marico.
Lower copra prices could also be a volume driver if management strategically
further lowers prices of the low-priced packs. Volume growth has historically
been a key driver of stock performance.
Quarterly results: We expect Q411 results to be stronger QoQ, given higher
hair oil and edible oil consumption in winter and during the ‘marriage season’.
Marico has also raised it prices 18% in January-March 2011. We assume 5%
volume growth in Q411.
High growth from new categories and products: Marico has entered some
fast-growing segments, including cooling hair oil and hair-loss solutions, in the
hair oil market. It has successfully launched Saffola Arise and introduced the
prototype of Saffola Oats in the health food category. We expect these new
categories to have the highest volume growth in the medium term.
Uptrading from generic to branded products: We believe consumers are
moving from generic to branded products, and Marico’s brands seem to be the
preferred choice in the segments where it has a presence. In the oil category, we
think Marico’s market share gains from generic oil will be a key catalyst for
stock performance.
International businesses and Kaya turnaround: FMCG sales in international
markets (excluding exports) have grown from 7% in FY05 to 23% in FY10. We
expect this momentum to continue, driven by Marico’s strategy to launch brands
from one market in other markets; for example, the launch of Egyptian brand
Hair Code dye in Bangladesh, Parachute Therapie in the Middle East, and
Parachute Gold hair oil in Egypt.
With the OTC products acquired from Derma Rx, we believe Kaya will turn
around and increase its contribution to total product sales. The company is also
limiting the expansion of clinics in international markets in the medium term,
and is instead encouraging repeat visits by introducing new and lower-priced
services. We expect Kaya to turn around in FY13.
Sustained margin expansion: We believe operating margins will remain on an
uptrend because:
(1) Parachute is a strong brand, rated #1 among all oil brands in India by AC
Nielsen. We expect volume growth in branded products to lead to higher
margins in the oil business.
(2) In the health food business, Marico is introducing some products in the
high-growth breakfast cereals and additives segments. Once these acquire
scale, they should contribute to the operating margin.
(3) The ongoing restructuring of Kaya clinics should help it turn around and
contribute to profit.
(4) Some of its international businesses are sub-scale and are either at the
building or investment phase. We are confident that these businesses will
be as profitable as the domestic ones, and add to the company’s
profitability.
Risks
We believe the risks to our estimates are: 1) unfavourable copra price
movement; 2) lower-than-expected volume growth due to declining hair oil
consumption; 3) execution risk in the Kaya business; 4) franchise quality; and
5) failure to take share from the informal hair and edible oil markets.
Valuation and basis for our price target
We initiate coverage with a Buy rating and a 12-month price target of Rs160.00.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our key
assumptions are a WACC of 10.6%, beta of 0.51 and a terminal year growth rate
of 5%. At our price target, Marico’s implied FY12E PE would be 27.3x.
Marico is trading at 23x FY12E PE, a discount to sector average of 25x. We
believe Marico will re-rate and trade at a premium to the sector, given:
(1) its pricing power as the market leader in the categories in which operates;
(2) the potential for higher-than-industry volume growth in its core business,
due to aggressive inroads in rural markets where consumption is steadily
rising;
(3) the growth potential in health foods, and for the international and Kaya
businesses to contribute to profit;
(4) its entry into categories that offer higher than the company’s historical
average growth, thus providing visibility on faster-than-historical volume
growth; and
(5) its presence in categories that are unlikely to compete with MNCs.
Marico consistently narrowed its discount to the sector PE over 2002-10. We
believe that in periods of high pricing power, its PE has expanded while in periods
of high commodity inflation, its discount to the sector has widened.
We expect commodity prices to fall and Marico’s pricing power to improve.
Further, we believe the health food business, Kaya clinics, and the international
businesses are all sub-scale currently and expect them to contribute materially to
the bottom line in future. We expect higher profit from these new businesses and
brands than the core coconut oil business. The scaling up of new businesses
should also help Marico’s PE band to delink from underlying raw materials
prices.
UBS versus consensus
Our EPS estimates are 5-8% higher than consensus estimates. There are 16
buy/outperform, six neutral/hold, and five sell/underperform recommendations
on Marico, according to Reuters. Our operating profit estimate is ahead of
consensus, as we view falling copra prices as a positive for margins because the
company seldom lowers its prices. With steady prices, we expect margin
expansion in the hair oil business. Our net profit growth estimate is below our
operating profit growth estimate as the health food and Kaya businesses are
currently loss-making.
Marico Ltd
Marico is the leading producer and distributor of hair oil, which it sells under the
Parachute and Nihar (33-35% of sales) brands. Other hair oils contribute 13% to
sales. The company also manufactures cooking oil under the Saffola brand (15%
of sales). It operates a chain of beauty and well-being clinics under the brand
name Kaya (7% of sales). International sales, mainly in Bangladesh, Egypt,
Malaysia, Singapore, South Africa, and the Middle East, contribute 23%.
Statement of Risk
We believe key sector risks include rising commodity-prices and the inability of
consumer companies to pass on price increases in an increasingly competitive
market. Companies in the sector pay low corporate tax because their factories
are generally located in areas that are designated as tax benefit zones; any
change in this law could affect earnings. We believe risks to our estimates for
Marico are: unfavourable copra price movement; lower-than-expected volume
growth due to the declining hair oil consumption; execution-related risk in the
Kaya business; franchise quality risk; and failure to take share from the informal
hair and edible oil markets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Marico Ltd
Strong brands = re-rating potential
Initiate coverage with a Buy rating
Marico is the leading coconut oil producer in India with strong brand equity for its
Parachute brand. The company is extending Saffola, its cooking oil brand into the
health food segment because of safflower’s (the main raw material) health
properties. Based on its strong brands and distribution leverage, and little
competition from multinational corporations (MNCs), we forecast an earnings
CAGR of 29% for FY11-13. We expect its PE to outperform the sector average,
resulting in a re-rating of the stock. At our price target of Rs160, Marico would trade at 27x
FY12E PE.
Parachute: significant growth opportunities
We believe Parachute (30% of total revenue) will remain the major earnings
contributor. We expect wider distribution and income growth in rural markets to
accelerate consumer uptrading, from generic to branded hair oil. Weakening copra
prices could be a key catalyst for share price performance, in our view.
We expect substantial growth opportunities for Marico, with its health foods
scaling up, Kaya (beauty and skincare clinics) in turnaround mode, and
international businesses likely to contribute faster growth in segments such as male
grooming in Egypt, Malaysia and Vietnam. Our model does not include the new
businesses, and hence earnings from these businesses would have a positive impact
on our forecasts.
Valuation: DCF-based price target of Rs160.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume 10.6% WACC.
Investment Thesis
We initiate coverage of Marico with a Buy rating and price target of Rs160.00
Marico has evolved from a pure coconut oil manufacturing company to a
diversified staples company that now has value-added oils, health foods, beauty
and skincare clinics (Kaya), international brands, and a dominant position in the
hair care segment in Bangladesh.
We believe Marico is well positioned to benefit from: 1) rising incomes in rural
India that are resulting in consumer uptrading from generic to branded hair and
edible oils; and 2) higher spending on health food, beauty therapies and male
grooming in urban India.
(1) We expect Marico’s new strategy will help it to dominate in the health food
segment, where Saffola (15% of sales) is the major brand. Marico was the
first to enter this food sub-segment. We expect health foods to grow rapidly
in urban India, where education, westernised lifestyles, and health
consciousness are resulting in healthier eating habits.
(2) In its core hair oil business, Marico has pricing premium as Parachute
(30% of sales) is the market leader. Due to the rising prosperity in rural
India, consumers are uptrading from generic to branded hair oil.
(3) The skincare Kaya business (7% of sales) should benefit from rising
disposable incomes in urban India. We expect the acquisition of Derma Rx
to result in a profitable over-the-counter (OTC) business within Kaya
clinics.
We believe Marico operates in categories where MNCs are unlikely to compete
and hence we are confident that growth rates and profitability will higher in the
near term—the key reasons for our higher-than-sector valuation.
Key catalysts
Softening copra prices: Copra, which comprises 40% of Marico’s raw
materials, is a domestic commodity, the price of which is linked to the agri-fuel
index and is dependent on domestic supply and demand. The price, which had
been rallying since October 2009, rising from Rs3,000/ton to Rs6,700/ton until
February 2011, has fallen recently to Rs5,800. Our sensitivity analysis suggests
a fall in the copra price would yield higher margins and a re-rating of Marico.
Lower copra prices could also be a volume driver if management strategically
further lowers prices of the low-priced packs. Volume growth has historically
been a key driver of stock performance.
Quarterly results: We expect Q411 results to be stronger QoQ, given higher
hair oil and edible oil consumption in winter and during the ‘marriage season’.
Marico has also raised it prices 18% in January-March 2011. We assume 5%
volume growth in Q411.
High growth from new categories and products: Marico has entered some
fast-growing segments, including cooling hair oil and hair-loss solutions, in the
hair oil market. It has successfully launched Saffola Arise and introduced the
prototype of Saffola Oats in the health food category. We expect these new
categories to have the highest volume growth in the medium term.
Uptrading from generic to branded products: We believe consumers are
moving from generic to branded products, and Marico’s brands seem to be the
preferred choice in the segments where it has a presence. In the oil category, we
think Marico’s market share gains from generic oil will be a key catalyst for
stock performance.
International businesses and Kaya turnaround: FMCG sales in international
markets (excluding exports) have grown from 7% in FY05 to 23% in FY10. We
expect this momentum to continue, driven by Marico’s strategy to launch brands
from one market in other markets; for example, the launch of Egyptian brand
Hair Code dye in Bangladesh, Parachute Therapie in the Middle East, and
Parachute Gold hair oil in Egypt.
With the OTC products acquired from Derma Rx, we believe Kaya will turn
around and increase its contribution to total product sales. The company is also
limiting the expansion of clinics in international markets in the medium term,
and is instead encouraging repeat visits by introducing new and lower-priced
services. We expect Kaya to turn around in FY13.
Sustained margin expansion: We believe operating margins will remain on an
uptrend because:
(1) Parachute is a strong brand, rated #1 among all oil brands in India by AC
Nielsen. We expect volume growth in branded products to lead to higher
margins in the oil business.
(2) In the health food business, Marico is introducing some products in the
high-growth breakfast cereals and additives segments. Once these acquire
scale, they should contribute to the operating margin.
(3) The ongoing restructuring of Kaya clinics should help it turn around and
contribute to profit.
(4) Some of its international businesses are sub-scale and are either at the
building or investment phase. We are confident that these businesses will
be as profitable as the domestic ones, and add to the company’s
profitability.
Risks
We believe the risks to our estimates are: 1) unfavourable copra price
movement; 2) lower-than-expected volume growth due to declining hair oil
consumption; 3) execution risk in the Kaya business; 4) franchise quality; and
5) failure to take share from the informal hair and edible oil markets.
Valuation and basis for our price target
We initiate coverage with a Buy rating and a 12-month price target of Rs160.00.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. Our key
assumptions are a WACC of 10.6%, beta of 0.51 and a terminal year growth rate
of 5%. At our price target, Marico’s implied FY12E PE would be 27.3x.
Marico is trading at 23x FY12E PE, a discount to sector average of 25x. We
believe Marico will re-rate and trade at a premium to the sector, given:
(1) its pricing power as the market leader in the categories in which operates;
(2) the potential for higher-than-industry volume growth in its core business,
due to aggressive inroads in rural markets where consumption is steadily
rising;
(3) the growth potential in health foods, and for the international and Kaya
businesses to contribute to profit;
(4) its entry into categories that offer higher than the company’s historical
average growth, thus providing visibility on faster-than-historical volume
growth; and
(5) its presence in categories that are unlikely to compete with MNCs.
Marico consistently narrowed its discount to the sector PE over 2002-10. We
believe that in periods of high pricing power, its PE has expanded while in periods
of high commodity inflation, its discount to the sector has widened.
We expect commodity prices to fall and Marico’s pricing power to improve.
Further, we believe the health food business, Kaya clinics, and the international
businesses are all sub-scale currently and expect them to contribute materially to
the bottom line in future. We expect higher profit from these new businesses and
brands than the core coconut oil business. The scaling up of new businesses
should also help Marico’s PE band to delink from underlying raw materials
prices.
UBS versus consensus
Our EPS estimates are 5-8% higher than consensus estimates. There are 16
buy/outperform, six neutral/hold, and five sell/underperform recommendations
on Marico, according to Reuters. Our operating profit estimate is ahead of
consensus, as we view falling copra prices as a positive for margins because the
company seldom lowers its prices. With steady prices, we expect margin
expansion in the hair oil business. Our net profit growth estimate is below our
operating profit growth estimate as the health food and Kaya businesses are
currently loss-making.
Marico Ltd
Marico is the leading producer and distributor of hair oil, which it sells under the
Parachute and Nihar (33-35% of sales) brands. Other hair oils contribute 13% to
sales. The company also manufactures cooking oil under the Saffola brand (15%
of sales). It operates a chain of beauty and well-being clinics under the brand
name Kaya (7% of sales). International sales, mainly in Bangladesh, Egypt,
Malaysia, Singapore, South Africa, and the Middle East, contribute 23%.
Statement of Risk
We believe key sector risks include rising commodity-prices and the inability of
consumer companies to pass on price increases in an increasingly competitive
market. Companies in the sector pay low corporate tax because their factories
are generally located in areas that are designated as tax benefit zones; any
change in this law could affect earnings. We believe risks to our estimates for
Marico are: unfavourable copra price movement; lower-than-expected volume
growth due to the declining hair oil consumption; execution-related risk in the
Kaya business; franchise quality risk; and failure to take share from the informal
hair and edible oil markets.
No comments:
Post a Comment