Marico (Q1 FY15) – BUY

India Infoline News Service | Mumbai |

Marico recorded strong 25.2% yoy increase in consolidated revenues at Rs16.2bn during Q1 FY15 – above our expectations of Rs14.8bn.

CMP Rs257, Target Rs296, Upside 15.3% 
  • Marico surpassed our expectations of ~Rs15bn by recording strong 25.2% yoy increase in revenues at Rs16.2bn during Q1 FY15

  • Parachute’s rigid portfolio witnessed ~6% yoy volume growth. Marico has increased Parachute prices by ~33% to manage input cost inflation

  • International business recorded healthy 16% yoy growth in revenues at Rs3.4bn with constant currency growth 9.6%

  • OPM declined by 60bps to 16.5% due to sharp 380bps increase in raw material cost on account of sharp rise in copra prices. 170bps/130bps decline in overhead and advertising cost restricted further erosion

  • Net profit registered ~20% yoy growth at Rs1.9bn - above our expectations of Rs1.8bn

  • We maintain Buy rating on the stock with a revised 9-month target price of Rs296

Result table
(Rs m) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 16,192 12,930 25.2 10,698 51.4
Other operating income 39 30 29.7 22 73.8
Total Income 16,231 12,960 25.2 10,721 51.4
Material cost (8,911) (6,620) 34.6 (5,597) 59.2
Personnel cost (854) (710) 20.4 (651) 31.2
Advertising cost (1,922) (1,700) 13.0 (1,219) 57.6
Other overheads (1,878) (1,720) 9.2 (1,710) 9.8
Operating profit 2,666 2,210 20.7 1,543 72.8
OPM (%) 16.5 17.1 (62) bps 14.4 205 bps
Depreciation (204) (160) 27.3 (215) (5.4)
Interest (70) (100) (29.6) (68) 4.3
Other income 183 140 30.9 128 42.7
PBT 2,576 2,090 23.2 1,388 85.5
Tax (678) (500) 35.7 (473) 43.6
Effective tax rate (%) 26.3 23.9 34.0
Minority interest (44) (40) 10.6 (28) 58.9
Reported PAT 1,853 1,550 19.5 888 108.7
PAT margin (%) 11.4 12.0 (55) bps 8.3 314 bps
Ann. EPS (Rs) 11.5 9.6 19.5 5.5 108.7
Source: Company, India Infoline Research

Revenue growth beats expectations

Marico recorded strong 25.2% yoy increase in consolidated revenues at Rs16.2bn during Q1 FY15 – above our expectations of Rs14.8bn. Domestic FMCG revenues increased by ~28% yoy at ~Rs1.3bn, with a modest volume growth of 6.5% driven by ~20% price hikes across the portfolio to mitigate the impact of input cost inflation. Rural market growth at (33%) continues to outpace the urban market growth (25%). Modern trade (9% of domestic turnover) reported ~27% yoy growth. While international business recorded healthy 16.3% yoy growth (constant currency growth 9.6%) in revenues at Rs3.4bn driven by strong growth in Bangladesh and MENA markets.


Growths reported across segments Q1 FY15
Categories Q1 FY15 % of Group's turnover basis FY14 results
Value growth Volume growth
Marico India 28% 6% 75%
Parachute Coconut Oil (Rigid packs) 41% 6% 23%
Value Added Hair Oils portfolio 28% 11% 18%
Saffola (Refined Edible Oil) 14% 10% 15%
Source: Company, India Infoline Research

Segmentwise market shares
Categories Old New Change bps*
Parachute 56% 56% 50
Saffola 57% 55% (200)
Value Added hair Oils 27% 28% 100
Shanti Amla hair Oil 27% 30% 300
Source: Company, India Infoline Research * Market shares may not be comparable due to change in AC Nielson panel

Brandwise performance

  • Parachute’s rigid portfolio (packs in blue bottles) witnessed 41% yoy growth led by ~6% yoy volume growth (however Parachute sachets witnessed a volume decline). Marico has taken weighted price increase of ~19% in Q1 FY15 over and above 14% price hike taken in FY14 to offset inflationary pressures in copra prices.

  • Value added hair oils grew by 28% yoy driven by 11% yoy underlying volume growth. Marico has taken a weighted average price hike of 6% to offset inflationary pressure in raw material and packaging costs.

  • Saffola registered 14% revenue growth led by ~10% volume growth during the quarter (~11% yoy in Q4 FY14). It’s a second consecutive quarter of double-digit volume growth. The management expects the Saffola volume growth to remain in the range of 10-11% over next 3-4 years due to aggressive push and higher penetration in rural areas. Saffola Oats enjoys 17% value market share and is now No. 2 player in the market. Saffola Oats has crossed Rs500mn revenues during FY14 and is expected to continue to witness robust growth going forward. The management expects its Saffola food business clock Rs700-750mn revenues in FY15 and ~Rs1bn revenues in FY16.

  • Due to inflationary trend and lower discretionary spends, the category growth rates of Post Wash Serums, Hair Gels/Creams and Deodorants has come off considerably. This coupled with a high base and competitive intensity has resulted into flat performance of the Youth portfolio (including Set Wet, Zatak and Livon).

International business reports healthy 16% yoy growth

International business (~25% revenue contribution) recorded healthy 16.3% yoy growth (constant currency growth 9.6%) in revenues at Rs3.4bn driven by strong growth in Bangladesh and MENA markets. The Bangladesh market reported 14% yoy growth (in constant currency) in Q1 FY15 driven overall volume growth of 5%+ and market share gains across categories. The management stated that value added hair oils, mail grooming and hair colour segment would add to the next leg of growth. Further, the company expects its Bangladesh business to register double digit growth over next 3-5 years. MENA business registered 18% yoy constant currency growth driven by strong recovery in Middle East region. The Vietnam business reported a flat growth due to weak consumer sentiment. Vietnam is expected to face consumption headwinds and is expected to witness muted growth in the immediate term. Marico has increased stake in International Consumer Product Corporation from 85% in March’14 to 92.73%. South Africa business registered 9% yoy constant currency growth despite challenging macro conditions.


Sales growth across geographies
Geography Sales growth (yoy %)
Bangladesh* 14%
MENA* 18%
South Africa* 9%
South East Asia* Flat
International business (Reported) 16%
International business (Constant Currency) 10%
Source: Company, India Infoline Research  * on constant currency basis

Operating margins declined by 60bps due to sharp increase in raw material cost

Operating margins declined by 60bps to 16.5% (on a high base) due to sharp 380bps increase in raw material cost on account of sharp rise in copra prices (up by 131% yoy and 22% qoq). A 170bps/130bps decline in overhead and advertising cost restricted further margin erosion. The copra crop is estimated to be lower by 8% as compared to the previous year due to weak rainfall in Tamil Nadu last year. On a yoy basis, Marico has taken total price increase of ~33% to mitigate the impact. The management has guided adspend to sales ratio of 12% for FY15.


Cost Analysis
As a % of net sales Q1 FY15 Q1 FY14 bps yoy Q4 FY14 bps qoq
Material cost 55.0 51.2 383 52.3 271
Personnel cost 5.3 5.5 (21) 6.1 (81)
Advertising cost 11.9 13.1 (128) 11.4 47
Other overheads 11.6 13.3 (171) 16.0 (439)
Source: Company, IIFL Research

Net profit marginally above expectations at Rs1.9bn up by ~20% yoy

Net profit registered ~20% yoy increase to Rs1.9bn – marginally above our expectations of Rs1.8bn driven by strong topline growth and higher other income. The growth could have been even better but for higher tax outgo (26.3% in Q1 FY15 against 23.9% in Q1 FY14). The effective tax rate is expected to be ~28-29% for FY15 and FY16 (27.4% in FY14) as most of the tax exemptions are getting over by FY15.

Enjoys strong pricing power, maintain Buy

Marico continues to grow in line with or ahead of the market in categories it operates in. With its strong pricing power, over the long term Marico has been able to expand operating margins despite steep rise in input prices. Marico’s strategy of diversifying its product portfolio by entering into new categories (Livon Conditioning cream colour, Bio-oil etc) and increased focus on youth brands will be the key growth driver going forward. Marico plans to double sales over the next four years by entering categories and geographies that are attractive in terms of market potential. The company also plans to cross-pollinate products between geographies. At the current market price of Rs257, the stock is trading at 24.3x FY16E EPS of Rs10.5. We maintain Buy rating on the stock with a revised 9-month target price of Rs296 (earlier Rs285).


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Revenues 45,843 46,762 55,915 63,146
yoy growth (%) 15.5 2.0 19.6 12.9
Operating profit 6,139 7,377 8,443 9,993
OPM (%) 13.4 15.8 15.1 15.8
Pre-exceptional PAT 3,627 4,854 5,691 6,799
Reported PAT 3,959 4,854 5,691 6,799
yoy growth (%) 24.8 22.6 17.3 19.5
EPS (Rs) 5.6 7.5 8.8 10.5
P/E (x) 45.6 34.1 29.1 24.3
Price/Book (x) 8.4 12.2 10.2 8.6
EV/EBITDA (x) 27.8 22.6 19.6 16.5
Debt/Equity (x) 0.4 0.4 0.3 0.2
RoE (%) 23.2 29.0 38.1 38.1
RoCE (%) 24.3 30.7 42.0 45.2
Source: Company, India Infoline Research

***Note: This is a NSE Chart

 

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