>MARICO INDUSTRIES: reduce visibility on future growth enginesO (NOMURA)

■ Kaya remains an overhang
As we see it, one of the issues facing Marico is a steady deterioration in the fortunes of its flagship business, Kaya Skin Clinic. High attrition and low consumer retention are unlikely to be resolved quickly, we believe. Our assumptions now build in a loss of INR100mn in FY11F, from our prior assumption of a marginal profit.

■ Margins unlikely to be sustained at current levels
The operating margin for the core business (ex Kaya) is at an all-time high of 14.6%, but we think this is unlikely to be sustained at current levels. We expect rising input costs, lack of pricing power and continuing high A&P spend to suppress margins in FY11F.

■ All positives factored in; risk/reward unfavourable
While we lift our earnings forecasts by 3% for FY11F and 7% for FY12F, we believe current valuations factor in all the positives. On our reading, the stock is trading at 27.3x FY11F earnings — a 38% premium to its long-term average P/E multiple. We believe the risk/reward proposition is unfavourable.

■ Downgrading to REDUCE
Our downgrade to REDUCE reflects our view that, in the near term, the business is likely to face strong headwinds. Margin pressure in the core business, continuing losses at Kaya and rich-looking valuations are key factors in our rating change. Our new sum-of-the-parts valuation is INR118, of which the core business accounts for INR109 (20x FY12F EPS) and Kaya INR9 (2x FY12F sales). Potential downside from our new price target stands at 7%.

To read the full report: MARICO INDUSTRIES