Urban discretionary demand still remains muted • Marico’s Q3FY15 results :ICICI Securities, report

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Urban discretionary demand still remains muted • Marico’s Q3FY15 results were below our estimates on both the revenues & earnings front with sales growth of 20.9% to | 1448.9 crore (I-direct estimate: | 1500.1 crore). The growth has been largely led by prices with copra prices up 39% YoY • Domestic volume growth was 5%, led by 10% growth in value added hair oil & 8% growth in Parachute rigid pack. Saffola volume growth was dismal at 3% with urban discretionary demand staying muted • Operating margins contracted 50 bps as raw material has increased 289 bps with the company holding high cost inventory of copra. Though copra prices are ~20% lower from August 2014, it is still 39% higher compared to Q3FY14. Net profit grew 18% YoY Brand strength aids in reviving volume growth Led by Marico’s strong brand equity, the company’s volume growth across its key product portfolio, Parachute coconut oil rigid packs (23% of sales), Saffola refined oil (15% of sales) and value added hair oils (18% of sales) remained high at 9-11%, ~15% and ~20%, respectively in FY08- 12. From Q3FY13 onwards, Marico’s volume growth was witnessing constant stress led by a slowdown in consumption demand in the economy and a steep decline in urban discretionary demand. As Marico’s portfolio is largely urban centric (~70% of sales), the company’s volume growth across these brands, Parachute, Saffola and value added hair oils (VAHO), dipped to ~2%, ~9%, and ~13%, respectively, in 9MFY14. From Q4FY14, however, volume growth has finally started witnessing an uptick with growth in H1FY15 for Parachute and Saffola at 6% and 10%, respectively. Though, the growth in urban concentrated portfolio is still growing with slower pace, we believe that a revival in discretionary demand and improving economic scenario would drive growth in FY16E & FY17E Gaining strength in higher growth categories Led by Marico’s strong brand equity in its two flagship brands, Parachute (associated with nourishment and purity) and Saffola (associated with health and wellness), the company has successfully extended its brands into higher growth and underpenetrated categories of advanced/value added hair oils (Parachute Advansed), body lotions (Parachute body lotion) and breakfast cereals (Saffola Oats, masala oats and muesli). Further, the company’s acquisition of youth brands, Set Wet & Zatak (deodorants) and Livon (hair care) provides it a platform to grow in the segments of future through already established brand equity. Marico has also extended its brand equity of Livon to enter the hair colour segment that is experiencing robust growth in India. Hence, we believe that led by Marico’s strong brand strength and entry into higher growth segments, revenue and volume growth would remain strong through FY16-17E. Earnings to grow at 21.9% CAGR; maintain BUY Marico has the ability to drive healthy sales growth at 19.4% CAGR (FY14- 17E) aided by expansion into rural areas and capturing the revival in urban growth through its strong brands. Further, with increasing contribution of health and wellness products, youth brands and stabilising operations in the international business, we expect margins to improve to 17.7% by FY17E, driving profitability growth at 21.9% CAGR in FY14-17E. We value the stock at 32x FY17E EPS of | 13.6 assigning the stock a target price of | 420 with a BUY rating.

LINK
http://content.icicidirect.com/mailimages/IDirect_Marico_Q3FY15.pdf