HOLD Marico - Strong Volumes on Higher Offerings - PINC Result Review

Strong Volumes on Higher Offerings

Marico reported Q1FY11 numbers with net sales growth of 13% on the back of 16% volume growth. The performance was much better than the single digit sales growth reported in the last two quarters. Parachute and Saffola displayed 11% and 18% volume growth respectively. Gross margins contracted by 79bps on higher promotional offering. Higher Copra prices (4% YoY) were largely neutralised by the reduction in Safflower oil prices (12% YoY). A&P expenditure and staff cost (% of net sales) declined by 32bps and 16bps resulting in EBITDA margins declining by 49bps. Lower interest and tax burden translated into 25% growth in adjusted PAT (excluding exceptional expenses in Q1FY10).

We retain our estimates and maintain HOLD recommendation while raise our TP to Rs128.

Parachute MS (%) dips, Saffola retains strong growth
Parachute hair oil (as a whole) displayed 11% volume growth while its market share shrunk by 200bps. Meanwhile, Saffola maintained its strong growth on new product launches and higher promotional offerings.

Gross margins under pressure
Gross margins contracted 79bps largely on higher promotional offering. Copra prices rose by 4% while Safflower price reduced by 12% but the net effect was only 10bps on total raw material cost (% of net sales).

Key Earnings Call Highlights

1) Price hike to be in 4-5% range while retail price of Copra to go up by 8-10% in Q2, 2) Gross margins to remain stable in the next few quarters, 3) EBITDA margins in International business stood at ~12% and 4) Tax rate for FY11E and FY12E at 18-20%.

VALUATIONS AND RECOMMENDATION

We retain our target multiple at 22x, slightly lower than the FMCG sector multiple for FY12. Lack of visibility in Kaya business and limited product portfolio justifies the discount in multiple. At 22x FY12E earnings our TP stands at Rs128. At CMP, the stock is fairly valued so we maintain our 'HOLD' recommendation.

Source : Equity Bulls

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