Marico - Well oiled machine - HDFC Securities

We are infused with confidence about the company's domestic business driven by Parachute and Saffola and its strong brand salience. Paras acquisition gives the company access to 'category of future'. We are enthused by company's strategy to enter healthy lifestyle categories and heightened rural focus (rural contribution to sales surged to 30% in 1QFY13 from 25% in FY10). International business to gain traction and margin to expand. Recommend OPF with TP of INR 240/sh.

Parachute and Saffola drive domestic business

Parachute continues to report resilient volume growth aided by up-trading from unbranded and loose coconut oil. Saffola to witness secular growth as 1) Saffola gains share in premium refined edible oil market (Saffola's volume grew ~9% in 1HFY13 vis-à-vis Sundrop's flat growth) and 2) consumers uptrade to healthier edible oils. We expect long-term volume growth for Saffola and Parachute to be ~15% and 7-8%, respectively.

Company is constantly investing in categories of future which will lessen Marico's dependence on edible oils and hair oils as 1) Paras brands contribute ~4% of Marico's sales (expected to grow at 30%), 2) the company expects foods to contribute 25% of Saffola from current 5% in next 5 years and 3) Parachute body lotion's success marks its entry into skin care category.

International business to witness margin boost

As the acquisitions stabilize, we expects international business margin to rise from the current 10-11% to 13-14% over the next two-three years. Also, Bangladesh provides immense opportunities as the company can leverage its existing distribution (Parachute: 80% market share) for other product categories (value added hair oil launched in Bangladesh). Marico envisages its international business to grow at ~15% yoy on constant currency basis.

However, there exists near term pressure in international business (high single digit growth in FY13E) due to 1) geopolitical issue in MENA, 2) Bangladesh is facing challenges due to double digit inflation and downward GDP estimates.

Valuations : upside exist

We appreciate Marico's established brand equity, focus on new growth drivers and price inelasticity (Parachute volume growth remained unaffected despite 32% price hike in span of 2 years). However, in near term, Saffola and international business to remain under pressure. At CMP, the stock is trading at 28.6x FY14E and 23.2x FY15E. Recommend OPF with TP of INR 240/sh (25x FY15E).

Source : Equity Bulls

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