Marico Ltd : HOLD

Price Hikes & Lower RM Costs to Improve Margins

Marico Ltd reported consolidated net revenues of Rs 7.5 bn (up 24% YoY), EBITDA of Rs 0.8 bn (dn 7%  YoY)  and  Adj  PAT  of  Rs  276  mn (dn 51 % YoY) in Q4FY11. Results were below our expectations due to higher RM costs, depreciation & interest expense (related to the ICP acquisition).

Key highlights

• Healthy volume growth of 12% YoY in FY11, may not sustain: Parachute rigid pack up 10 % YoY, Saffola up16 % YoY and hair care up 24% YoY. Growth in Parachute was impacted by a cumulative price hike of 32%, which led to a modest 5% volume growth in H2FY11. Given the inflationary environment and price hikes effected, we expect volume growth in FY12E to lag FY11.
• Rising Copra prices (~40% of RM) impacted margins:  FY11 Gross profit margin contracted by 430 bps to 48.3% due to 82% YoY increase in copra prices. The full impact of the price hikes will only be seen in Q1FY12E. We believe given the impact of price hikes and likely softening of Copra prices in FY12E, margins will improve going ahead. We forecast operating margins of 13.6% and 13.9% for FY12E & FY13E respectively vs.13.4% in FY11.
• Kaya (India): Losses stood at Rs 141 mn (excl Derma) for FY11. However, business fundamentals are improving as same-clinic growth has increased to 8% in H2FY11 vs. a de-growth in H1FY11.  We expect Kaya India to break-even in FY12E.
• International business: Growth was 27% in constant currency terms which was led by 17% volume growth in FY11. Sales (of ~Rs 200 mn) in the MENA region were impacted by the political unrest during Q4. While the situation in Egypt is improving, the outlook in some parts of the region is still uncertain.  We have reduced our growth outlook (organic) to 19% vs. 24% earlier for FY12E, for the Int’l biz (ex-Vietnam) to account for the loss of sales due to political unrest in the region.
• Extraordinary expenses in Q4FY11: This qtr saw many exceptional items and one-offs. The three major items include: (1) sales proceeds from the divestment of Sweekar (Rs 500 mn); (2) reversal of provision for excise duty (Rs 293 mn) which is now accounted for in contingent liabilities (this reversal is as per accounting standards); & (3) Revenue recognition for Kaya (Rs 313 mn) for services not yet rendered. Other items relate to impairment of intangible assets (Kaya & International Biz), accelerated depreciation (Kaya) and amortization of intangible assets (Kaya & International Biz).

Valuation

We have downgraded our EPS by 2% for FY12E mainly due to higher interest costs. FY13E estimates are largely unchanged. The stock is trading at 25x 1-yr fwd EPS, higher than its 5-yr upper quartile range of 23.6x.  Our 1-yr target price of Rs 127 is based on 23x FY12E EPS. Maintain HOLD rating on the stock.