Marico Industries - FMCG: Quarterly Result Update - PhillipCapital

Marico reported Q2FY13 numbers were significantly below our revenue and earnings estimate. We downgrade Marico to Neutral on account of sluggish revenue growth, weaker-than-expected trading environment and probable volume enabling pricing actions in the core portfolio which are likely to be margin dilutive. The key takeaways of the results and conference call are as follows:

Revenue growth slower than our expectations; India FMCG business disappoints: Marico reported a revenue growth of 19% YoY for Q2FY13 which was slower than our expectations on account of sluggish performance of focus brand Saffola and slower growth in international operations. The Consumer Products business (India FMCG business) reported an organic revenue growth of only 12% YoY (adjusting for acquisition of brands- Setwet, Zatak and Livon). Youth brands (Paras Personal Care portfolio) reported growth of 28% YoY with absolute sales of Rs. 460 mn. Domestic organic volume growth was 10% YoY which was lower than our expectations as both Saffola at 6% YoY volume growth and Parachute at 9% YoY volume growth were slower than our expectations. The management has indicated that the premium charged for these brands is resulting in slower up-trading and conversions. The management has indicated that they will initiate pricing actions to resuscitate volume growth in the categories. The management has guided for 10% YoY volume growth for the Saffola brand for FY13. Value added hair oils continued to grow at rapid pace registering a volume growth of 20% YoY.

International business sluggish with constant currency growth of 3% YoY: While the International business group (IBG) reported a revenue growth of 16% YoY, the constant currency growth was only 3% YoY. The management indicated that Bangladesh registered a revenue decline of 1% YoY and South Africa was impacted by transport strike. The management also indicated that Egypt is seeing revival in growth and South Asian markets of Vietnam and Malaysia are gaining traction. We believe growth in the international business unit is likely to improve in the forthcoming quarters.

EBIDTA and earnings growth but below expectations: EBIDTA growth at 27% YoY was slower than expectations as advertising expenses moved up sharply by 78% YoY and increased by 450bps as a % of sales. Earnings growth was significantly below our expectations at 10% YoY on account of higher interest costs, high tax rate and equity dilution.

Downward revision of estimates; Downgrade to Neutral: We have revised our FY13E and FY14E earnings downward on account of sluggish revenue growth and rising cost structure. We value the company at 26x FY14E earnings at Rs 191. Considering the limited downside from the current levels we downgrade the stock to Neutral.

Source : Equity Bulls

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