CMP Rs208, Target Rs222, Upside 6.8%
Parachute and value added hair oils recorded 14%/23% value and 9%/20% volume growth respectively. Marico has increased its market share in the Amla category by 690bps yoy to ~22%. Impacted by lower discretionary spends Saffola recorded a modest 6% yoy volume growth. The management expects Saffola brand to record volume growth of ~10% for 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 16% yoy growth at ~Rs2.8bn during the quarter. In constant currency terms though the growth was muted at 3% yoy as revenues from the Marico’s key market of Bangladesh (39% of international revenues) declined by ~1% yoy impacted by a challenging demand environment. Most markets struggled with South Africa reporting flat sales and MENA growing 6%. The only market which posted strong growth was the ICP business in Vietnam at 23%. Operating margins expanded 150bps qoq to 10% led by Bangladesh business which reported 14% OPM. 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 38% yoy revenue growth at Rs915mn during Q2 FY13. The same store sales growth for Kaya business in India and Middle East was at ~10% yoy. Kaya registered a profit of Rs57mn at PBIT level against a loss of Rs48mn during Q2 FY12. 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.
Operating margins expanded by 80bps to 12.8% aided by a 690bps drop in raw material cost. Key reason being a sharp ~33% yoy decline in copra prices (were at pick in Q4 FY11). Prices of other key inputs safflower (up 59% yoy) and rice bran (up 16% yoy) though still remain firm. The margin expansion could have been even better but for the sharp 450bps jump advertising cost. The management expects advertising spends to remain at ~11-12% of sales for the next few years.
Pre-tax profit increased by 17.6% yoy to Rs1.2bn partly aided by healthy revenue growth. Effective tax rate for the quarter was higher at 24.8% against 20.4% during Q2 FY12 due to higher quantum of profits coming through from India as compared to the international business which is largely tax exempt. The management expects its effective tax rate to be ~24%-25% in FY13 and ~22%-23% in FY14. Net profit for the quarter increased by 11.1% yoy to Rs889mn – below our expectation of Rs1.1bn.
Marico has shown a healthy performance during Q2 FY13 with its domestic hair oil portfolio registering 17% volume growth. Marico management expects to maintain its strong volume growth momentum going forward. The international business is expected record healthy double digit growth trajectory H2 FY13. Kaya is expected to continue its strong revenue growth trajectory and break-even by FY14. Given the lower input cost scenario (steep decline in copra prices) coupled with strong revenue and volume growth, we expect Marico to witness ~28% earnings CAGR over FY12-14E. At the current market price of Rs208, the stock is trading at 25.3x FY14E EPS of Rs8.2. We recommend Market Performer rating on the stock with a revised 9-month target price of Rs222 (earlier Rs211).