>MARICO (MOTILAL OSWAL)

Consolidated sales grew 7.3% to Rs6b due to 14% volume growth. Lower input cost (copra prices down ~14% YoY and safflower prices down ~9% YoY) enabled gross margin expansion of 687bp YoY, but a 470bp increase in ad spends restricted EBITDA margin expansion to 100bp at 14.1%. PBT grew 16.8% and adjusted PAT de-grew 2.7% to Rs578m due to a low tax rate in 4QFY09 (tax credit on the Sundari sale).

■ Volume growth momentum intact; value growth suffers due to price cuts: Volume growth momentum remained intact for Marico even as value growth declined due to price cuts. Domestic sales growth of 6.7% was largely volume led (14%) as product prices (both Parachute and Saffola) were lower YoY. Parachute volumes grew 10% YoY; Saffola volumes were up 13% YoY. In 4QFY10, hair oil volumes grew 27% YoY.

■ Lower input costs enable EBITDA margin expansion of 100bp: Marico's margins expanded as a fall in input prices offset declines in realizations. In 4QFY10, prices of major raw materials like copra (~40% of raw material cost) and safflower (13% of raw material cost) declined by ~14% and ~9% respectively YoY, and dropped 20% and 22% respectively in FY10. We are positive about the management's pricing strategy, which involves according priority to building the franchise instead of expanding margins at the cost of volumes.

■ Expected PAT 21% CAGR over FY10-12; excise case resolution, Kaya turnaround upside risks: We expect Marico to sustain its double-digit volume growth and value growth to be muted due to fewer price increases. We are factoring in the impact of (1) lower excise provision up to 75% of the disputed amount, (2) lower tax rates due to the commissioning of a new unit in Ponta Sahib, and (3) the impact of price cuts in Parachute coconut oil. Our estimates factor in 16.8% sales growth over FY10-12; a 40bp margin contraction in FY11 and flat margins in FY12. We are
assuming a lower tax rate of 20% in FY11 and 19% in FY12. PAT is expected to post 21% CAGR over FY10-12. The stock trades at 23.7x FY11E EPS of Rs4.7 and 19xFY12E EPS of Rs5.9. Maintain Buy.

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