Monday, February 6, 2012

>MARICO INDUSTRIES: Robust operational performance; RM tailwinds ahead

 Strong operational performance; 16% domestic volume growth: Marico reported strong operational Q3Y12 performance, with 16% domestic volume growth (13% overall) and 300bps gross margin expansion being the key highlights. Notwithstanding the price hikes in its core brands and general inflationary headwinds to consumer wallets, volume growth of 16% reinforces MRCO’s dominant brand franchise. Sales, EBITDA and PAT came in at Rs10.56bn (up 29% YoY), Rs1.22bn (up 22.1% YoY) and Rs841m (up 21%YoY), against our expectations of Rs10bn, Rs1.19bn and Rs810m, respectively. Recurring PAT adjusted for exceptional grew solid 25%. Parachute, Saffola and Value-added hair oils posted 13%, 15% and 2% volume growth, while Kaya reported 15% same store clinic growth. International division delivered 16% organic revenue growth.

 Softening in RM and price hikes boost gross margins: With high RM in the base and softening in Copra (down 9% QoQ), standalone as well as consol gross margins expanded 300bps (consol gross margins up 120bps YoY). Like to like EBITDA margins (adjusting for Rs96m as excise provisioning in Q3FY11) contracted ~200bps driven by higher ad-spends (up170bps). Current quarter also contains a charge of Rs129m in Kaya Middle East, pertaining to misstatement of expenses related to earlier years, thus, resulting in
consequent overstatement of Kaya profitability in the relevant period. As per the management, appropriate action has been taken for this lapse and monitoring process has been further strengthened.

 Maintain ‘Accumulate’: MRCO’s continued strong volume driven performance, despite the aggressive price hikes (taken in 2HFY11) and turn-around in RM dynamics, creates a good tailwind for EPS upgrades, going forward. However, current valuations at 23.6x FY13e is fair, in our view. Maintain ‘Accumulate’, with a revised Mar-13 TP of Rs170. Turnaround in Copra price trajectory is the key risk.