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UBS Investment Research
Marico Ltd
L imited upside, stretched valuations
Event: gross margin under pressure, stock up 31% YTD in absolute terms
The price of copra oil, the key raw material for Marico, has been up during the
year, reaching Rs7,150/quintal in May 2011. We believe GM for Marico is under
pressure. GM declined 550bps during Q1 FY12, while the share price has been up
51% YTD relative to the Sensex. We believe GM will continue to be under
pressure.
Impact: downgrade to Neutral on valuation
For FY12/13, we raise our revenue estimates on better-than-expected volumes
(+3.5%/+5.7%), but increase COGS/sales (54.5%/53.2%) estimates, owing to high
commodity costs. Our estimates reflect the management focus on growing volumes
at the cost of margins. We downgrade Marico from Buy to Neutral, lowering the
FY12 EPS estimate 2.4% and raising the FY13/14 EPS estimate by 0.5%/4.4%.
Action: Parachute is a very strong brand
Marico’s flagship brand ‘Parachute’ posted +10% volume growth in FY11 despite
a ~32% price increase. Management has leveraged Parachute by reducing
promotional volumes ~46% YoY. Management has also extended Parachute’s
equity to the value-added hair oil segments, which are doing well. Despite good
volume momentum and a successful management strategy, the key risk to our
neutral call is the reversal of the underlying commodity prices.
Valuation: raise price target to Rs185
We raise our price target from Rs170 to Rs185. We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool. At our price target, Marico would trade at 26.3x FY13E PE.
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 potential risk for Marico includes unfavourable copra price
movement, lesser than expected volume growth due to declining trend in hair oil
consumption and failure to take incremental share from unorganized hair and
edible oil market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Marico Ltd
L imited upside, stretched valuations
Event: gross margin under pressure, stock up 31% YTD in absolute terms
The price of copra oil, the key raw material for Marico, has been up during the
year, reaching Rs7,150/quintal in May 2011. We believe GM for Marico is under
pressure. GM declined 550bps during Q1 FY12, while the share price has been up
51% YTD relative to the Sensex. We believe GM will continue to be under
pressure.
Impact: downgrade to Neutral on valuation
For FY12/13, we raise our revenue estimates on better-than-expected volumes
(+3.5%/+5.7%), but increase COGS/sales (54.5%/53.2%) estimates, owing to high
commodity costs. Our estimates reflect the management focus on growing volumes
at the cost of margins. We downgrade Marico from Buy to Neutral, lowering the
FY12 EPS estimate 2.4% and raising the FY13/14 EPS estimate by 0.5%/4.4%.
Action: Parachute is a very strong brand
Marico’s flagship brand ‘Parachute’ posted +10% volume growth in FY11 despite
a ~32% price increase. Management has leveraged Parachute by reducing
promotional volumes ~46% YoY. Management has also extended Parachute’s
equity to the value-added hair oil segments, which are doing well. Despite good
volume momentum and a successful management strategy, the key risk to our
neutral call is the reversal of the underlying commodity prices.
Valuation: raise price target to Rs185
We raise our price target from Rs170 to Rs185. We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool. At our price target, Marico would trade at 26.3x FY13E PE.
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 potential risk for Marico includes unfavourable copra price
movement, lesser than expected volume growth due to declining trend in hair oil
consumption and failure to take incremental share from unorganized hair and
edible oil market.
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