>Marico (EMKAY)

Marico reported a robust revenue growth of 23.0% yoy to Rs5.6 bn driven by (1) 10% volume-led and (2) 9% attributed to pricing benefit. – in line with our estimates. Operating Profit grew by 60.8% yoy to Rs733 mn driven by strong revenue growth coupled with lower advertising and sales promotion expenses. Adjusted net profit grew by 97.0% yoy to Rs594 mn - above our estimates. Nevertheless, the reported net profit grew by 8.9% yoy to Rs444.1 mn – in line with estimates. Management shared a promising outlook with continuation of growth momentum in FY10E - growth will be largely volume-led with negligible gains from pricing. We fine-tuned our earnings estimates for FY10E to Rs3.7/Share and introduce FY11E earnings estimates at Rs4.2/Share. The stock has rallied by 11.1% in last 15-days in anticipation of Q4FY09 performance and has been out-performer in last 6 months. In absence of near-term news flows and all positives factored in earnings estimates with low probability of earnings upgrades, we downgrade the rating from ACCUMULATE to REDUCE with target price of Rs60.

Adjusted net profit up 97% yoy to Rs564 mn, above estimates
During Q4FY09, Marico reported robust 20.0% yoy growth in revenues to Rs5.6 bn (10% was volume-led and 9% attributed to pricing benefits), in line with our estimates. Marico maintained its volume growth momentum, downplaying concerns of slowdown in growth momentum. The operating profit grew by 60.8% yoy to Rs733 mn, driven by strong revenue growth coupled with lower advertising and sales promotion expenses during the quarter. Consequently, the operating margins jumped 330 bps yoy to 13.1%. Marico reported 8.9% yoy increase in its reported net profit to Rs444.1 mn. Nevertheless, company’s adjusted net profit (excluding exceptional items) jumped higher at 97.0% yoy to Rs594.4 mn, ahead of our estimates.

Robust growth in adjusted net profit is primarily attributed to strong operational performance and lower tax provisioning at Rs0.1 mn compared to Rs39 mn in Q408. Lower tax outgo is on account of provisions for liabilities of Sundari LLC, which was treated as business loss in the quarter. Marico made provisions of Rs150.3 mn towards the liabilities of Sundari LLC in Q409 (exceptional charge) versus a gain of Rs106.1 mn on sale of Sil business in Q408.

Improvement in ‘Saffola’ volumes; Kaya continue the growth pace
After disappointing volume performance in Q309 ‘Saffola’ has shown improvement on qoq basis. Saffola reported 5% yoy growth compared to mere 3% in Q3FY09. Also, the recent drop in Safflower prices and reduction in premium pricing versus competition in few ‘Saffola’ blend is likely to revive the growth momentum in coming quarters. Kaya continues to maintain its high growth momentum and reported 57% growth in FY09 to Rs1.6 bn. ‘Kaya’ downplayed any fears of slowdown in business momentum with (1) revenue growth at 33% yoy to Rs400 mn and (2) same store growth at 13% yoy, purely attributed to higher footfalls. Kaya continued its expansion with addition of 11 clinics in the quarter.

Promising outlook for FY10E, growth momentum to continue
In the analyst meet, management shared a promising outlook with continuation of growth momentum in FY10E. Company believes that FY10E growth will be largely volume-led with negligible gains from pricing. Consequently, Marico is eyeing promising volume growth in key brands and product segments like (1) 8-9% volume growth in ‘Parachute’ (2) 10-12% volume growth for ‘Saffola’ and (3) 12- 14% volume growth in Hair Oil business. Marico continues to remain optimistic on the growth momentum of Kaya business and expects to turn it profitable in FY10. Management has highlighted the softening of raw material costs especially Copra and Safflower – strong probability of margin expansion in FY10E.

We downgrade our rating from ACCUMULATE to REDUCE
We give thumbs up to Marico’s Q409 performance marked by (1) robust volume growth in ‘Parachute’ and ‘Hair Oils’ coupled with (2) above expected performance of ‘Kaya’ fully downplaying the fears of slowdown in growth momentum. Further, Marico has hinted at promising growth outlook coupled with gains at operational level with drop in input costs. Consequently, we fine-tune our earnings estimates for FY10E to Rs3.7/Share and introduce FY11E earnings estimates at Rs4.2/Share. The stock has rallied by 11.1% in last 15-days in anticipation of Q4FY09 performance and has outperformed in last 6 months. In absence of near-term news flows and all positives factored in earnings estimates with low probability of earnings upgrades, we downgrade the rating from ACCUMULATE to REDUCE with target price of Rs60.

To see full report: MAIRCO