>MARICO

Recommendation: Hold
Price target: Rs196
Current market price: Rs189

Price target revised to Rs196

Result highlights

• Q1FY2013 results-a strong improvement in margins: Marico's Q1FY2013 performance was better than our expectation largely because of a higher than expected operating profit margin (OPM), which stood at 14.8% against our estimate of 13.5%. The gross profit margin (GPM) witnessed a strong improvement of 659 basis points year on year (YoY) to 49.5%, largely on account of a sharp correction in the copra prices (copra accounts for 40% of the raw material cost). The domestic consumer business maintained its strong growth momentum with a 16% sales volume growth during the quarter. An 18% year-on-year (Y-o-Y) sales volume growth in Parachute rigid packs was the highlight of the quarter. Around 3% Y-o-Y organic growth in the international business and a single-digit same-store sales growth in the domestic Kaya business were the low points of the quarter. 
  
  
• Results snapshot: Marico's net sales grew by 21.8% YoY to Rs1,270.3 crore in Q1FY2013 (it was slightly below our expectation of Rs1,285.5 crore). The growth was driven by a 14% sales volume growth during the quarter. The GPM improved significantly by 659 basis points YoY to 49.5% on the back of a 40% correction in the copra prices on a Y-o-Y basis and a low base of Q1FY2012. Like most of the other fast moving consumer goods (FMCG) companies, Marico spent a large part of the GPM savings on advertisement activities. The advertisement spend as a percentage of its total sales increased by about 300 basis points YoY to 12.3% during the quarter. Hence, the OPM improved by 262 basis points YoY to 14.8% (ahead of our expectation of 13.5%). The operating profit grew by 48.0% YoY to Rs187.9 crore and the adjusted profit after tax (PAT) rose by 45.4% YoY to Rs125.8 crore.
  
  
• Outlook and valuation: Q1FY2013 was a quarter of strong operating performance for Marico with the volume of the domestic consumer product business growing in mid teens. However, the management in its commentary has adopted a cautious stance for the future quarters, considering the domestic macro uncertainties and the deficient rainfall in most parts of India (which is likely to affect the rural market for FMCG products). Having said that, the long-term domestic growth story is intact for Marico.
  We broadly maintain our earnings estimates for FY2013 and FY2014. Marico has traded at an average one-year forward multiple of ~25x in the last two years on the back of a consistently good business performance. Hence, we value the stock at 25x its FY2014E EPS of Rs7.9 and revise our price target to Rs196. At the current market price the stock trades at 29.5x its FY2013E EPS of Rs6.4 and 24.1x its FY2014 EPS of Rs7.9. In view of the limited upside from the current level, we maintain our Hold recommendation on the stock.

RISH TRADER