Consistent performance in its major categories of hair oils and edible oils along with strong traction in the international businesses have led to re-rating of the stock from the historical one-year forward average price/earnings multiple of 22 times to about 25 times currently. This has led to Marico’s stock delivering strong returns, especially since end-March 2012. Given the prospects of its domestic and international businesses, it should deliver healthy returns, going forward as well.
While the company expects its international businesses to regain momentum soon, analysts estimate its domestic revenues to grow by 18 per cent annually over FY12-15. Though there are some pressure points building in the form of a slowing economy, weak monsoon and recent increase in input prices (which could have some impact on demand and margins), analysts believe there are levers as well for the management to offset most such pressures.
“We do not see any reason for the stock to de-rate given the stability in management strategy, high pricing power and tailwinds on margins. We value the stock at 25 times one-year forward earnings,” say Arnab Mitra and Akshay Saxena of Credit Suisse in their note on the company.
| EXPANDING MARGINS | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 4,008 | 4,821 | 5,667 |
| Y-o-Y change (%) | 28.1 | 20.3 | 17.6 |
| Ebitda margin (%) | 12.1 | 13.6 | 14.3 |
| Y-o-Y change (bps) | -50 | 150 | 70 |
| Net profit | 323 | 462 | 542 |
| Y-o-Y change (%) | 33.3 | 42.9 | 17.3 |
| P/E (x) | 36.3 | 26.5 | 22.6 |
| E: Estimates Source: Company, analyst reports | |||
Most analysts are positive on the stock, and expect it to deliver 15-20 per cent return from current levels of Rs 193. Among key monitorables are the progress on Kaya Clinic (in terms of pace of turnaround) and copra prices (a key input in the domestic oil business).
Global gains
Marico’s international operations in Bangladesh and the MENA (Middle East and North Africa) regions were hit due to the geopolitical tensions in those countries. The management, however, indicates that things are returning to normalcy in Bangladesh and Egypt markets. It also expects international margins to improve in the second half of this fiscal. Angel Broking analysts in their August 10 report say, “Marico maintains its leadership position in different categories in different regions. We expect the company’s international business to post better performance going ahead due to signs of improvement seen in the macro-environment in its international markets.”
In addition to existing products, Marico’s investments in new product launches and higher ad spends are likely to bear fruits and drive growth from the second half of this fiscal, believe analysts.
| ROBUST VOLUME GROWTH | |||||
| Volume Growth (%) | Q1'FY12 | Q2'FY12 | Q3'FY12 | Q4'FY12 | Q1'FY13 |
| Parachute Rigid | 10.0 | 10.0 | 13.0 | 11.0 | 18.0 |
| Saffola | 15.0 | 11.0 | 15.0 | 3.3 | 12.0 |
| Hair oils | 32.0 | 26.0 | 20.0 | 17.5 | 25.0 |
| Domestic Business | 14.0 | 14.0 | 13.0 | 10.3 | 16.0 |
| Source: Company, MOSL | |||||
Going ahead, the management expects the international business (a fourth of consolidated revenues) to post double-digit growth in constant currency terms this fiscal. It believes the Ebitda margins could improve from the prevailing 9-10 per cent to 12 per cent in FY13. In the longer-run (next few years), analysts expect Marico’s international business revenues to grow by 22-23 per cent annually. Further boost could come from possible acquisitions, which the company is eyeing.
Healthy domestic outlook
Consistent market share gains in its key products (Parachute, value added oils and Saffola) have enabled Marico to post robust volume growth of 10-16 per cent over the past 10 quarters. However, going forward, the management expects this figure to normalise around the 8-10 per cent mark, in sync with the slowing domestic economy, which though is still healthy.
While Parachute has been gobbling up market share from unbranded coconut oils, aggressive pricing strategy is enabling it to scale up its presence in the value-added oils segment (Amla and light hair oils). Further, Saffola’s positioning as a healthy heart brand and its extension to other non-oil categories, such as oats and rice, will strengthen the brand and drive topline. The management expects its non-oil Saffola products to command 25 per cent market share in the next two-three years.
Marico’s foray into the high-margin personal care segment is expected to act as a strong margin lever, going forward. Its new products such as Parachute Body Lotion are gaining good traction. The company expects its Paras portfolio (hair gels, leavons, etc) to grow by 25-35 per cent in FY13. However, the foray into new segments is also expected to keep adspends at elevated levels.
Emkay Global analysts note, “We expect the spends to remain at elevated levels due to continued focus on Saffola Oats, Parachute Body Lotion and also, investment on personal care brands acquired from Reckitt Benckiser. The company has also initiated various promotions in Parachute rigid packs and Saffola Gold.”
These adspends were partly supported by increasing margin gains from lower input prices and partly due to pricing power. Marico has enjoyed strong pricing power in its Parachute portfolio, enabling it to maintain healthy margins. Notably, as against a 35 per cent year-on-year fall in copra prices, Marico has cut prices by just three per cent on a weighted average basis in the recent quarters. However, given that copra prices have inched up a bit lately on weak monsoons, it could shave off some of the margin gains if the trend continues. The management believes that copra prices have bottomed out.
