Marico - Packing a punch - Edelweiss

Marico's Q2FY13 sales were in line with our estimate; however, PAT came below expectation due to higher tax rate. Key positives include: (i) 684bps YoY expansion in gross margin (largely ploughed back into ad spends); (ii) 260bps YoY market share gain in value added hair oil; and (iii) 28% YoY growth in youth brands (Paras). Key negatives were: (i) slow 6% YoY volume growth in Saffola (12% YoY in Q1FY13; impacted due to slowdown in CSD and discretionary); and (ii) slow pace of international business (constant currency sales growth 3% YoY). Maintain 'BUY'.

Gross margin gain partly ploughed back into ad spends

Marico's revenue grew 19.4% YoY and volume surged 14% YoY (organic volume growth at 9% YoY) in Q2FY13. Gross margin expanded due to soft copra prices. EBITDA margin jumped 79bps only due to ad spends inching up 453bps YoY (rolled out Saffola Oats and Muesli nationally; high spend on youth and skin cream brands). Tax rate surged 438bps as growth in Saffola (enjoys tax benefits) and Middle East (zero tax) was slower than Parachute (no tax benefits).

Volume growth dips for Saffola

Parachute coconut oil rigid packs and value added hair oil volumes grew 9.0% and 20.0% YoY, respectively. Saffola posted 6% volume growth due to slowdown in discretionary demand and impact of CSD (13-15% of sales). International business grew 16% YoY, but constant currency growth was 3% YoY. Kaya sales grew by 38% YoY (25% YoY in constant currency) and same store growth was 10% YoY. It posted a positive PBIT of INR57mn (loss of INR48mn YoY in Q2FY12). International business grew at 16% YoY (3% YoY in constant currency) and EBITDA margin stood at 10% (up 150bps YoY).

Outlook and valuations: Positive; maintain 'BUY'

We remain enthused by Marico's focus on new growth drivers like mass skin care, youth and food category while existing business continues to grow strongly. At CMP, the stock is trading at 31.8x FY13E and 26.5x FY14E. We maintain 'BUY' recommendation and 'Sector Outperformer' rating.

Source : Equity Bulls

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