Marico - 'Parachutes' Of Growth Intact - Nirmal Bang

We believe multiple positive levers will play out for Marico over the next three years like: 1) Benefit of correction in key raw material copra?s price (down 35% YoY), 2) Improved profitability in international and Kaya businesses (31% of revenue), and 3) Re-investment of a part of gross margin expansion into spending on advertising to spur the launch of new products. Further, the company has managed to gain market share of 500bps-700bps since FY10 in domestic business (69% of revenue), helping it to grow faster than the market. We expect the trend to continue with the addition of high-growth and lowerpenetrated product offerings such as body lotion, oats and recently acquired Paras product portfolio. All this would lead to a 26% earnings CAGR over FY12-FY15E, in our view, the highest among its peers. We have assigned a Buy rating to Marico with a target price of Rs260, at 26x FY15E EPS.

Strong market position in domestic business: Marico has gained market share (volume) by 500bps-700bps in Parachute hair oil, Saffola edible oil, and Value added hair oils since FY10. This has helped it to grow faster than the market in the current challenging economic environment and also aided in combating the 100% rise in copra prices over March 2010 to March 2011 without denting the profitability of its Parachute hair oil in absolute terms. Saffola's volume growth trajectory has moderated from 15% to 6% in 2QFY13 due to lower off-take and de-stocking at CSD (Canteen Stores Department), which we believe is likely to pick up with a probable cut in retail prices and normalisation at CSD. Value-added hair oils continue to witness strong volume growth of 20%-25%, thanks to packaging rehaul and participation in more sub-segments. We expect these trends to continue. Consequently, we expect a 18.6% revenue CAGR in domestic market over FY12-FY15E.

International business likely to pick up: In 1HFY13, Marico's international business reported weak performance with only a 3% value growth in constant currency terms largely led by price. This was on account of the transporters' strike which hurt its business in South Africa in 2QFY13 apart from challenging conditions in Bangladesh and MENA region. We expect things to improve from 2HFY13 with Marico expanding into non-coconut hair oil business in Bangladesh and political tensions easing in the MENA region improving the overall business environment. We have factored in a 16% revenue CAGR in its international business over FY12-FY15E.

Gross margin expansion to spur new product launch: We expect a 316bps gross margin expansion over FY12-FY15E largely led by copra price correction. However, the management's strategy to reinvest a substantial part of margin expansion on advertising to accelerate the launch of new products and gain further market share in existing businesses will limit overall OPM expansion. Further, we expect the margins in international business to move up from the current level (10%) to group margin (13%) over the next three years following improvement in volume and cost rationalisation along with Kaya business swinging to profitability. Consequently, we expect OPM expansion of 210bps over FY12-FY15E.

Source : Equity Bulls

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