Marico - Acquire High Margin Business, Uncertain Valuation; Maintain 'REDUCE'; TP Rs150 - PINC Research

Event Update - Marico

Acquire High Margin Business, Uncertain Valuation

Marico announced the acquisition of Paras Pharma's personal care (PC) business from Reckitt Benckiser. The key brands of this business are Zatak (Deo), Set Wet (Hair gel) and Livon (Hair Serum) which combined contributes ~Rs1.5bn of revenues. Although the deal size is not announced but we believe it should be ~Rs6bn (4 times of sales). We assumed it primarily be funded by debt raising as large part of the current internal accruals would be settled down towards the short term debt repayment. Therefore we expect that this acquisition would impact our FY13 earnings by 5% largely on account of interest burden net of tax (assumed at 11% rate).

We maintain our REDUCE rating with a TP of Rs150.

Brands' Sales Details

These three brands combined displayed ~20% growth in the past two years which was largely volume driven. Zatak brand (~45% of PC sales) consist 6% of Rs11bn Deo market and growing at ~35% rate. Livon (~35 of PC sales) is the market leader (~68% market share) in the Rs800mn Hair serum market while Set Wet (~20% of PC sales) consist 25% market share in the Hair gel market.

Margin Profile

Marico was muted on the profitability profile of these brands. However, we believe as EBITDA margin of Paras Pharma is >25% in which Healthcare portfolio consider to be very profitable business owing to leadership position of healthcare brands and low requirement of marking efforts, we assume PC margin to be ~18%.

Valuation Not Clear; Expect At Least 4 Times of Sales

Reckitt Benckiser recently bought Paras Pharma at ~8x of sales and as we believe PC is relatively low margin business the deal should be less than to the valuations of Paras Pharma deal. We believe the deal size should be at least ~Rs6bn which is 4x of FY12E sales.

Our Take

We believe categories in which these brands exist have immense potential to grow. Marico with its large distribution network and significant presence in the overseas market can further accelerate the growth momentum of these brands. However the key thing to watch would be the protection of EBITDA margin. With our business and deal assumption, we expect 5% EPS decline in our FY13 earnings. However, given the limited information on the deal, the same is not included in our earnings model.

Source : Equity Bulls

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