Marico - Lower Sales -> High A&P -> Sluggish Performance - Karvy

Marico's Q2FY13 performance was below our expectation. Net sales – excluding recently acquired Setwet, Zatak & Livon brands – have clocked slower growth of 14% YoY. Parachute rigid pack and Saffola has registered slower 9% and 6% volume growth as compared to the strong volume growth performance in the past 5-6 quarters. Copra price reduction has benefited and resulted into 634bps YoY and 211bps QoQ improvement in the gross margin. However, on account of higher A&P spending – were at 13.7% (% of sales) up 400bps YoY and 140bps QoQ- partially set off gross level profitability. EBITDA margin has expanded by mere 107bps YoY while it contracted by 175bps on QoQ basis. Lower other income and higher depreciation has further impacted the net profitability and resulted into slower PAT growth of 10% YoY while it declined by 30% on QoQ. PAT stood at Rs859mn (Karvy expectation Rs1,180mn). Although, we maintain our FY13-FY15 earnings estimates owing to the expectation of performance improvement in the coming quarters.

Despite lackluster sales growth in Q2 we maintain 19% sales CAGR for FY12- 15E: Although Marico's 14% sales growth (Ex-recently acquired brands) during the quarter was slowest of the past 8 quarters, we maintain 19% sales CAGR for FY12-15E. Parachute rigid pack volume growth during Q1FY13 was 18% hence slower volume growth during Q2FY13 was already expected. We maintain our 13.5% Parachute volume growth assumption for FY13. Saffola volume growth impacted due to lower discretionary spending by consumers and sales impact at CSD channel. However, owing to Saffola's long term positive outlook, we maintain 14% volume growth for FY14&FY15.

Expect A&P spending to lower in coming quarters: Marico due to strong gross level profitability has exceeded A&P spending which was required for its new launches as well as marketing efforts for International business. However, we expect slightly lower A&P spending in the coming quarters and maintain our A&P spending assumption at 12.5% of sales for FY13E-15E.

Outlook & Valuation

Consistent addition of products/categories and focus on all brands have enabled Marico to reduce high dependence on Parachute franchise. We value Marico on 24xP/E (at PEG of 1x which is average of past 5 years) on 24-month forward earnings. We maintain "BUY" rating with a target price at Rs. 231.

Source : Equity Bulls

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