Our interactions across our five sample states, re-affirmed our belief in Marico's dominance in coconut and hair oils. The company is capitalising on the opportunity of shift in preference towards branded coconut and hair oils in rural markets. This would be done through expanding its rural exposure during the last three years from about 27% to the current 32%.
Strong pricing power to aid margins
Pricing power of Parachute coconut oil, its key profit generator has been the success factor during the past few years. The brands strength and pricing power led to a substantial 454 bps improvement in Marico's margins from 8.8% in FY05 to 12.9% in FY08. Additionally during FY11 and FY12, years of steep inflation, the brand re-affirmed its strength by recording a volume growth of 11% despite a price hike of 32% in the last 12 months. During FY13, we expect the pricing power of Parachute coupled with drop in copra prices to expand EBITDA margins by 204bps to 14.2%.
Increasing dominance in coconut oil
Marico witnessed a marked improvement over its long term performance by gaining ground in the coconut oil segment where market shares across companies normally remain stagnant. In the coconut oil category Parachute gained about 300bps market share during 1QFY13.
Gaining ground in value added hair oils
Marico has successfully expanded the value added hair oils business through aggressive marketing and entry in to newer categories. This in turn has led to market share gains to the tune of 780bps to 24.8% during the last 5 years. Our channel checks suggest that a majority of the market share gains have been led by improvement in the South Indian market.
Acquisition of Paras Pharma's personal care biz to aid scalability
The acquisition provides the company meaningful entry in a fast growing category like Deodorant and strengthens its market share in hair styling gel and creams. The acquisition also provides Marico an entry in to a better margin profile business when compared to its existing business like hair oils and health based edible oil. Parachute coconut oil nevertheless has a high margin profile.
Valuation
We maintain our earnings estimates for FY13e and FY14e at INR7.2 and INR8.6 respectively. At the CMP of INR203, the stock is trading at a PE of 28.3x FY13e and 23.5x FY14e. We maintain our target price of INR198. In the current scenario, we don't see any scope for further upgrade in the stock or any case for further re-rating. We therefore maintain our HOLD rating on the stock with a target price of INR198.
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