Marico - Copra plays spoil sport in poor demand scenario - Prabhudas Lilladher

Marico (MRCO) continues to reel under the twin impact of soaring prices of Copra on one hand and poor consumer demand on the other. The company is likely to take another round of price increase in 'Parachute', which will delay demand recovery. We expect heightened competitive intensity in 'Saffola' and value-added hair oils. MRCO is looking at portfolio diversification and has entered Hair colour segment in India and has launched 'Saffola' and 'Set Wet' youth portfolio in Bangladesh. MRCO seems cognizant of poor returns in its past acquisitions and sub-optimal return ratios and is looking at sustaining 30%+ dividend payout. We estimate 17.4% PAT CAGR over FY14-16. We value the stock at Rs230 based on 23xDec15 EPS. Retain 'Accumulate'.

- Copra prices at an all-time high; HDPE and LLP prices firm: Copra prices are up 76% YoY, contrary to trends ahead of new crop in April 2014. HDPE and LLP prices are also up 23% and 20% YoY, respectively. Raw material prices for Saffola continue to remain benign; Kardi oil and Sunflower prices are down 30% and 14% YoY and Rice Bran oil is down 14.6% YoY.

- Volume growth expected to remain benign: We estimate that a sharp surge in Copra prices will reduce Parachute's gross margins by 20% from 59.9% in Q3FY13. MRCO is likely to undertake price increase in April to restore grams/kg. This will reduce the premium of Parachute over loose oils, but volume growth recovery looks difficult, given a weak demand scenario. Value-added hair oils are expected to sustain double-digit volume growth. Parachute Tender Coconut has received a lukewarm response. Youth brands are likely to sustain 20%+ growth. MRCO has entered the Hair colour segment under the 'Livon' brand in Feb 2014.

- IBD margins unsustainable: Bangladesh was impacted by political disturbances and should improve gradually. MRCO has expanded into 'Set Wet' youth portfolio; Saffola and Value-added hair oils to reduce dependence on Parachute. Vietnam has been maintaining high double-digit growth. Egypt is likely to recover in the coming year; IBD margins are likely to sustain between 13-14%.

Source : Equity Bulls

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