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Marico Ltd declared mixed set of results for Q3FY15 that was in-line with revenue estimates while outperforming on bottom-line front. Volume growth of 5% yoy in domestic region was disappointing. Net sales grew 20.9% yoy to reach Rs 14489 mn in Q3FY15 from Rs 11984 mn in Q3FY14 (vs. INSPL est: Rs 14805 mn). This growth was driven by 26% yoy growth in domestic business while international business grew by 6% yoy in constant currency terms. Volume growth in India business stood at 5% while overall volume growth stood at 2%. EBITDA grew 17% yoy to reach Rs 2334 mn in Q3FY15 from Rs 1995 mn in Q3FY14 (vs INSPL est: Rs 2295 mn). EBITDA margin contracted 25 bps yoy to reach 16.1% in Q3FY15 from 16.6% in Q3FY14. The company did not pass on all the inflation in commodity price (i.e. Copra mainly) to the consumer resulting in pressure on margins. This resulted in higher raw material cost which increased to 54.7% of sales in Q3FY15 from 51.8% in Q3FY14. PAT grew 18.1% yoy to reach Rs 1599 mn in Q3FY15 from Rs 1354 mn in Q3FY14 (vs INSPL est: Rs 1496 mn). PAT margin compressed 26 bps yoy to reach 11% in Q3FY15. PAT margin compression was lower than EBITDA margin compression on account of reduction in finance cost and lower effective tax rate. Finance cost reduced 29.4% yoy at Rs 52 mn in Q3FY15. Effective tax rate decreased to 25.7% in Q3FY15 from 26.1% in Q3FY14. India business grew well amid cost pressure India business (contributing ~75% to 9mFY15) grew by 26% yoy to reach Rs 11400 mn in Q3FY15 driven by price hikes. During the quarter volume grew by 5% yoy. PBIT margin in India business contracted 11 bps mainly due to raw material cost increases. For 9mFY15, India business grew 29.3% yoy to reach Rs 34990 mn against Rs 27068mn in 9mFY14. PBIT margin contracted 157 bps yoy to reach 16.8% in 9mFY15 mainly due to hyper inflation in input cost. Parachute Coconut Oil (Rigid packs) grew by 48% yoy and 8% yoy in value and volume terms in Q3FY15. In 9mFY15, value and volume growth stood at 31% yoy and 7% yoy respectively. As per the management, inflationary commodity prices tilt the competitive position to the company’s advantage as marginal players face pressure on working capital requirement front. Parachute along with Nihar increased its market share by more than 100 bps to 57% as competitive position continued to be favourable due to hyper-inflation. Saffola refined edible oil grew by 9% yoy and 3% yoy in value and volume terms. In 9mFY15, value and volume growth stood at 14% yoy and 7% yoy respectively. The growth in the quarter was lower due to increased price premium as compared to other refined oils and lower ad spends. The brand maintained its leadership position in the super premium refined edible oils segment with a market share of ~57% in twelve months ended December 2014. Saffola Oats grew by 48% in value terms. It maintained No.2 position in the oats category with value market share of 19%. In the flavoured oats market, it has a market share of 63% on Dec’14 exit basis. The company expects to reach Rs 800-900 mn in FY15 and is poised to cross Rs 1250 mn mark in FY16.
Value added hair oils portfolio (Parachute Advansed, Nihar Naturals and Hair and Care) grew 10% and 25% in volume and value terms in Q3FY15 respectively. This is the third consequent quarter of a strong double digit growth in the category. The company strengthened its leadership position in the value added hair oil segment with market share of 28% in volume terms and 22% in value terms in Q3FY15. Nihar Shanti Amla continued gaining market share and achieved a market share of 31% in Q3FY15 against 29% in Q3FY14 in the amla hair oils category. As per the company, Parachute Advansed Jasmine and Nihar Naturals Perfumed Oil portfolio are poised to cross Rs 2500 mn in FY15. Parachute Advansed Ayurvedic Oil, with presence in southern states, is likely to garner INR 600 - 650 mn turnover in FY16E. Parachute Advansed Body Lotion maintained its No.3 position with a market share of 6%. Its growth rate was muted due to delayed winters and delay in launch of winter range of products. The body lotion segment is estimated to be Rs ~9500 mn with low penetration levels of 20%. The category is growing at 2% in volume terms and 11% in value terms. In the longer term, the company plans to increase its participation in the skin care segment. Youth brands (Set Wet, Zatak, Livon) witnessed flat performance on yoy basis in Q3FY15.This muted performance was on account of delay in the re-launch of gel and lower ad spends in the category. The company strengthened its leader ship position in Hair Gels and Post Livon conditioner market with ~43% and ~82% share respectively. The company will focus on expanding on these high margin categories as their penetration levels are far lower in India as compared to other emerging markets. Set Wet and Zatak deodorants maintained its ranking in the category with 4% market share. Rural sales grew by 32% yoy and urban sales grew at 25% in Q3FY15. Rural sales now contribute more than 30% of India turnover. The company is now focusing on increasing its reach in rural areas which is likely to increase the share of rural sales to 35% in the next two years. Sales in modern trade (9% of domestic turnover) grew by 21% yoy in Q3FY15. CSD and Institutional sales grew at a healthy rate of 41%. International business profitability improved 519 bps yoy International business (contributing 25% to total turnover to 9mFY15) grew by 4.3% yoy to reach Rs 3120 mn in Q3FY15 from Rs 1990 mn in Q3FY14. The constant currency growth stood at 6% yoy. Operating margin contracted to 15.1% in Q3FY15 due to non-performance of Egypt. However, the management is of the opinion that the sustainable margin are likely to be in the range of 14%-15%. Bangladesh business reported topline growth of 18% yoy in constant currency terms in Q3FY15. This was driven by strong volume growth of 6% yoy. Parachute maintained its leadership position with 82% market share. The value added hair oils portfolio of the company grew at 21% yoy in value terms. The company launched Parachute Advansed Extra Care – a coconut based value added hair oil aimed at reducing hair fall. The Company’s HairCode brand (coupled with HairCode Active variant) continued to lead the powdered hair dye market with a market share of ~41%. HairCode Keshkala has gained 2% market share since its launch. The company expects that more than 80% of growth is likely to come from non-coconut oil portfolio backed by modest growth in the core coconut oil business. The Middle East and North Africa (MENA) business grew by 39% yoy on constant currency basis in Q3FY15 driven by strong recovery in the Middle East business. Parachute coconut oil continued to grow at healthy rate in volume terms in Q3FY15. Egypt de-grew 46% yoy in Q3FY15 due to one-time distribution transition undertaken by the company. The transition was aimed at eliminating dependence on single distributor and achieving better go-to-market (GTM) model for realizing the maximum distribution potential. According to the company, this is expected to bring in many benefits such as increased direct distribution, improved retail selling, professional set-up of distribution and reduced working capital requirement resulting in lower credit risk. This concludes the final phase of Go-to-market transformation in MENA.
South East Asia (Significant portion contributed by Vietnam) grew at 2% yoy in constant currency terms in Q3FY15. Overall sluggishness in the economy leading to reduced consumer confidence impacted Vietnam business. The management expects Vietnam to return to double digit growth trajectory going forward with improvement in economic scenario. The company continues to scale up its presence in neighbouring countries like Malaysia, Myanmar and Cambodia. South Africa reported topline growth of 9% yoy in constant currency terms in Q3FY15. Unemployment and labour relations pose challenge to near term performance of the region. As per the management, South Africa business is expected to remain below potential on higher inflation and interest rates, depreciating currency, subdued domestic demand and reduced investments into the country. Entered into an agreement to outsource processes Marico Ltd has appointed a global firm to outsource finance and accounts, procurement to pay and similar processes. The firm is likely to handle the demand planning as well. It would also take the company to auto-replenishment of stock at distributor level. It would reduce the inventory levels of distributors and improve their ROI. Also, the company senior management would get away from price negotiations and focus more on innovation and strategy. Outlook The management guided for volume growth of 8-10% and topline growth of 15- 20% in FY16E with operating margin in the band of 14-15% on consolidated basis. The management stated that demand remained weak in the quarter and is likely to remain subdued in near term. Volume growth and price corrections are likely to be key trends going forward. Margin pressure in near term is likely to remain due to high input cost inflation. The benefit of decline in copra prices should be visible from Q4FY15E. The company expects Marico International to deliver organic topline growth of 15-20% in constant currency terms in medium term and acquisition (if any) would add to it. International business is likely to have operating margin in the range of 14-15%. Any excess margin is likely to be ploughed back in the business for future growth. Significant portion of advertisement, selling and promotion (ASP) expenses are invested behind new products including Livon Hair color, Parachute Advansed Body Lotion in India and new launches in Bangladesh and Vietnam. Though ASP expenses grew 14.1% yoy in Q3FY15, on a percentage to sales basis it decline 60 bps yoy to reach 10.6%. In the medium term, the company expects ASP expenses to operate in the range of 11-12% of sales. Valuation At CMP of Rs 349, the stock trades at PE of 38x and 32.4x its FY15E and FY16E earnings estimate of Rs 9.2 and Rs 10.8 per share respectively. Indian consumption is under pressure due to high inflation and increasing prices. At the same time, many geographies in international market like Vietnam and South Africa are facing headwinds due to macro economic slowdown. We remain cautious on the volatility of copra prices, which is the key raw material for the company. However, we are positive on the market leadership position of the company in Indian and international markets. Hence we maintain our HOLD rating on the stock with target price of Rs 355 on the stock (valuing at 33x FY16E earnings).
LINK
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