Marico (Q4 FY13)

India Infoline News Service | Mumbai |

Coconut oil segment witnessed slower growth mainly due to increased price premium compared to loose hair oils. Marico has taken some price cuts to lower the premium and expects the growth to be back on track from Q1 FY14 (~8% yoy).

CMP Rs215, Target price Rs236, Upside 9.8%

Marico recorded modest 9.7% yoy growth in consolidated revenues at ~Rs10bn (below our expectations of Rs10.4bn) during Q4 FY13 mainly due to decline in the international business revenues. Adjusted net profit grew 1% yoy – below our expectations mainly due to higher overheads.

Domestic organic sales growth for the quarter was 6% yoy, with higher volume growth of 8% (i.e. negative pricing due to price cuts taken in line with correction in input prices). Coconut oil segment witnessed slower growth mainly due to increased price premium compared to loose hair oils. Marico has taken some price cuts to lower the premium and expects the growth to be back on track from Q1 FY14 (~8% yoy). Other hair oils segment registered 24% volume and 25% value growth during the quarter. Saffola registered mere 5% volume and value growth respectively mainly due to weakness in discretionary spends due to macro-economic slowdown as well as higher price premium compared to other brands.

Paras’ personal care products business (including Set Wet, Zatak and Livon) registered 18% yoy/21% yoy revenue growth during Q4 FY13/FY13 respectively. Saffola Oats has gained a market share of 13-14% and is now No. 2 player in the market. While, body lotions have garnered 7% market share and is No. 3 player now.

International business revenues declined by 1% yoy during the quarter but in constant currency terms the decline is higher at 8% yoy due to weak sales in GCC region. GCC sales - impacted by change in packaging. The management expects GCC sales growth to recover in H2 FY14. Due to operating deleverage, international business registered mere 8% margins compared to domestic business margins of 19% for FY13. For Q4 FY13, the international business margins were barely positive.

Marico was able to maintain its operating margins at ~12% aided by a 380bps drop in raw material cost. A sharp 290bps increase in overhead cost (due to certain legal expenses, forex losses and hedging) restricted further margin expansion.

Cost Analysis
As a % of net sales Q4 FY13 Q4 FY12 bps yoy Q3 FY13 bps qoq
Material cost 44.2 48.0 (377) 48.0 (378)
Personnel cost 9.9 9.2 70 7.8 213
Advertising cost 12.6 12.4 17 13.6 (96)
Other overheads 21.4 18.4 293 16.8 460
Total costs 88.1 88.0 3 86.1 199
Source: Company, IIFL Research

Effective tax rate for the quarter was higher at 43.2% against 20.9% during Q4 FY12 due to higher quantum of profits coming through from India (as compared to the international business which is largely tax exempt) and exceptional items. Adjusted for  exceptional items tax rate is ~20% in Q4 FY13 and ~24% in FY13.

Growth excluding the impact of non-comparable items
Particulars Q4 FY13 Q4 FY12 FY13 FY12
Reported Profit after Tax 839 697 3,959 3,171
Reported Growth (%) 20.3
24.8
Normalized Profits After Tax before considering exceptional and non comparable items 720 710 3,840 3,260
Normalized Growth (%) 1.0
18.0
Source: Company, IIFL Research

The Marico management expects improvement in volume growth in FY14 with reduction in price premium with competitor brands and improvement in sales growth and margin of international business on a low base. Marico is also likely to see financial leverage as cash generation is likely to reduce net debt. However, we have lowered our EPS estimates for FY14E/15E by 5%/6% respectively, on account of lower than expected sales and gross margin compared to our earlier estimates. At the current market price of Rs215, the stock is trading at 23.6x FY15E EPS of Rs9.1. We recommend Market Performer rating on the stock with a revised 9-month target price of Rs236 (earlier Rs256).

Results table
(Rs m) Q4 FY13 Q4 FY12 % yoy Q3 FY13 % qoq
Net sales 9,973 9,094 9.7 11,640 (14.3)
Material cost (4,410) (4,364) 1.1 (5,587) (21.1)
Personnel cost (987) (836) 18.0 (904) 9.2
Advertising cost (1,257) (1,131) 11.1 (1,578) (20.4)
Other overheads (2,130) (1,675) 27.1 (1,950) 9.2
Operating profit 1,189 1,088 9.3 1,620 (26.6)
OPM (%) 11.9 12.0 (3) bps 13.9 (199) bps
Depreciation (253) (191) 32.9 (195) 29.9
Interest (113) (113) (0.4) (146) (22.9)
Other income 115 117 (1.6) 127 (9.6)
PBT 939 901 4.2 1,406 (33.2)
Tax (406) (189) 114.9 (360) 12.6
Effective tax rate (%) 43.2 20.9
25.6
Minority interest (26) 2 - (23) -
Adjusted PAT 507 714 (29.1) 1,023 (50.5)
Adj. PAT margin (%) 5.1 7.9 (278) bps 8.8 (371) bps
Extra ordinary items 332 (18) - - -
Reported PAT 839 697 20.3 1,023 (18.0)
Ann. EPS (Rs) 3.1 4.6 (32.4) 6.3 (50.5)
Source: Company, India Infoline Research
BSE 312.70 [0.10] ([0.03]%)
NSE 313.05 1.10 (0.35%)

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