CMP Rs191, Target Rs211, Upside 10.4%
Parachute and value added hair oils recorded 18% and 25% volume growth respectively. A 25% volume growth in value added hair oils was driven by market share gains across segments. Marico has increased its market share in the Amla category by 530bps yoy to 20%. Impacted by lower discretionary spends Saffola recorded a modest 12% yoy volume growth. The management expects Saffola brand to record volume growth of ~12-14% during FY13 and targets to derive ~25% of Saffola sales from healthy foods in the next 2-3 years.
The international FMCG business contributing ~24% to the group’s turnover recorded 17% yoy growth during the quarter. In constant currency terms though the growth was muted at 3% yoy. The Bangladesh business (40% of international revenues) revenues declined by 2% yoy impacted by a challenging demand environment. The management expects its international business to come back in healthy double digit growth trajectory in constant currency terms by H2 FY13 accompanied by operating margins in the range of ~11%-12% (currently at 8.5%) for FY13.
The Kaya business (contributing ~7% to revenues) recorded 29% yoy revenue growth during Q1 FY13. The same store sales growth for Kaya business in India and Middle East was at ~12% yoy however, impacted by weak demand environment the growth for India was in mere single digits. Kaya registered a loss of Rs73mn at PBIT level against Rs55.8mn during Q1 FY12. According to the management, the increase in loss was primarily due to a one time exceptional loss of Rs48mn on account of the proposed sale of Kaya Training Centre building. Excluding this exceptional item the losses have almost halved yoy to Rs25mn. The company plans to prototype a new retail format for Kaya business in India towards the latter half of the year with a smaller store format of ~500 square feet which will focus on sales of products and customized skin beauty services.
Revenues from Paras’ personal care products business were ~Rs100mn which represents less than one month’s (~20 days) revenues. Marico expects this business to record ~25-30% revenue growth per annum over the next three years.
Operating margins surprised us positively by expanding by 260bps to 14.6% fuelled by a 660bps drop in raw material cost. Key reason being a sharp 38% yoy decline in copra prices (were at pick in Q4 FY11). Prices of other key inputs safflower (up 46% yoy) and rice bran (up 20% yoy) though still remain firm. Marico plans to pass back part of the lower copra price benefit to the consumers especially in the lower price point (recruiter) packs. The margin expansion could have been even better but for the sharp 300bps jump advertising cost. The management expects advertising spends to remain at ~11-12% of sales for the next few years.