Marico (Q4 FY12)

CMP Rs177, Target price Rs196, Upside 10.5%

• Marico recorded healthy 22.9% yoy growth in consolidated revenues at Rs9.2bn (below our expectation of Rs9.6bn) during Q4 FY12 fuelled by strong underlying volume growth of 17%. Domestic volume growth was lower at 10.3% (16% in Q3 FY12), primarily owing to muted 3.3% yoy growth in Saffola due to a planned reduction in promotional volumes by the company and a stock correction in the Canteen Stores Department (CSD) segment. The management has indicated that the low growth rate in Saffola is a one quarter aberration and expects the volume growth to recover in the coming quarters.

Strong growth across key categories/ businesses

Source: Company, IIFL Research

* Without including Sweekar in the base. (Marico had divested Sweekar in March 2011)

Volume growths reported across segments

Source: Company, IIFL Research

• Marico’s flagship brand Parachute registered 11.1% volume growth in rigid packs during Q4 FY12 and FY12 respectively. Overall coconut oil segment witnessed 8.1% yoy volume growth while, the value added hair oils segment registered strong 17.5% yoy volume growth. While, Marico continues to gain market share in amla hair oils; the new launches like ayurvedic oils and cooling oil have also shown a strong performance during the quarter.
• The international FMCG business contributing ~23% to the group’s turnover recorded 37% yoy growth driven by 24% organic growth and 13% inorganic growth on account of ICP acquisition in Vietnam. The overall consumer demand in Bangladesh (40% of international revenues) was under pressure due to high inflation and sharp depreciation of local currency; the situation in Middle East has shown an improvement.

International FMCG business revenue growth break-up

Source: Company

• The Kaya business (contributing ~7% to revenues) recorded same store sales growth of 19% yoy during Q4 FY12 and 15% in FY12 led by new product and service offerings. For FY12, revenues increased by 33% to Rs2.8bn, while PBIT losses reduced to Rs291mn from Rs325mn in FY11 (PBT of Rs36mn in Q4 FY12). Marico plans to open 4-8 stores in India in FY12 and to maintain the momentum of same store collection growth. We expect the Kaya business to break even by FY14 with losses likely to continue over the next year.

• Operating margins surprised us positively by expanding by 140bps to 12% fuelled by a 660bps drop in raw material cost. Key reason being a sharp 26% yoy decline in copra prices (were at pick in Q4 FY11). Prices of other key inputs safflower (up 28% yoy) and rice bran (up 34% yoy) though still remain firm. Marico has taken price hikes of ~8-9% in Saffola in January 2012 to mitigate the input cost impact. The margin expansion could have been even better but for the sharp 390bps jump advertising cost. The management expects advertising spends to remain at ~11-12% of sales for the next few years.Pre-tax profit jumped to Rs901mn from Rs398mn in Q4 FY11 partly aided by lower interest outgo and depreciation. Adjusted net profit for the quarter declined by 2.7% yoy to Rs697mn. After excluding the impact of exceptional and non comparable items net profit grew by ~9% yoy.

One‐off items in the base quarter (Q4 FY11)

Source: Company, IIFL Research

• During February 2012, Marico bought Paras Pharma’s personal care portfolio from Reckitt Benckiser for Rs7.5bn. Marico has already raised Rs5bn from preferential issue of equity (~5% dilution) to GIC and Barings India PE to fund the acquisition. The company plans to pay the balance amount through debt and internal accruals.
• Marico management expects to maintain its strong volume growth momentum going forward. Kaya is expected to continue its strong revenue growth trajectory and break-even by FY14. With unrest Middle East easing off growth in the international business is likely to be back on track. We expect the ICP acquisition to further fuel revenue growth. Price hikes and correction in the input prices will provide cushion to operating margins. At the current market price of Rs177, the stock is trading at 20.8x FY14E EPS of Rs8.5. We recommend Buy with a revised 9-month target price of Rs196 (earlier Rs173).

Results table

Source: Company, India Infoline Research