With copra prices softening, Marico is expected to see some recovery in margins in FY13, unlike in FY12. The company’s strategy of expanding Saffola and entering into the high-margin functional foods segment, rural focus, foray into new categories, such as skin care and strategic buyouts augur well for its long-term growth. For instance, its new products, such as Saffola Oats will be extended to all parts of South India, in addition to Tamil Nadu and Kerala. In regions it operates in, the company enjoys a market share of about 10 per cent in the oats category and is now among the top three players. Its value-added hair oil portfolio has also reported double-digit volume growth in the past 10 quarters (20 per cent in December 2011 quarter).
While turnaround of the loss-making Kaya business (expected in FY14) will add to the profits significantly and possibly lead to a rerating of the stock, the international business is also expected to grow at a healthy pace in FY13.
At Rs 171, Marico is trading at 24 times FY13 estimated earnings, close to the lower PE band of 24-30 times. These valuations seem attractive compared to other FMCG stocks, which trade at significant premiums to their historical averages. Most analysts are bullish on Marico and expect gains of 15-20 per cent over a one-year period.
| PROFIT BOOST | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Revenues | 3,128 | 4,070 | 4,816 |
| % chg | 17.6 | 30.1 | 18.3 |
| Ebitda (%) | 13.1 | 12.3 | 14.2 |
| Change (bps) | -100 | -80 | 190 |
| Net profit | 286 | 344 | 467 |
| % chg | 23.6 | 19.9 | 36.0 |
| EPS (Rs) | 4.2 | 5.6 | 7.3 |
| PE (x) | 40.5 | 30.6 | 23.6 |
| E: Estimates Source: Bloomberg Change is y-o-y | |||
Boost from falling copra prices
After surging 44 per cent in FY12 (till December 2011), prices of copra (40 per cent of input costs in standalone operations) have cooled off recently. As on March 30, 2012, copra prices have fallen by 18 per cent to Rs 4,450 per quintal, compared to its closing on December 30, 2011. This would aid expansion in Marico’s Ebitda margins. Sanjay Singh and Pratik Biyani, analysts at Standard Chartered Research, believe a sustained copra price fall will improve Marico’s standalone Ebitda margin by 200 basis points in FY13, to 16.4 per cent. This will lead to earnings estimate upgrades of two per cent each for FY13 and FY14.
However, the company may have to push up its ad spends as falling copra prices result in higher competition from local and unorganised players, thus offsetting some of the margin gains. Analysts believe volume growth of the Parachute oil business (30 per cent of standalone revenues) will be six to eight per cent in the medium term, due to a high base effect and higher competition.
Paras biz: EPS accretive within 2 years
In February 2012, Marico acquired the personal care portfolio of Paras. This comprises deodourants, skin care and hair grooming products. Analysts believe Paras will start contributing to Marico’s earnings from July 2012. Analysts at HDFC Securities estimate Paras to post revenues of Rs 150 crore in FY12 and expect it to be EPS accretive in the next 1.5 to 2 years. At 18-22 per cent, Paras’ Ebitda margins are expected to be higher than Marico’s overall margins. The acquisition gives Marico access to several new categories, such as skin creams and lip balms, amongst others, and will help diversify revenue streams. Marico’s strong presence in South, West and East India can be combined with Paras’ distribution strengths in North and West. About 20 per cent of Paras’ outlets are not covered by Marico’s distribution network. The Paras deal is thus, a major step to help Marico become a significant player in the beauty, wellness and healthy lifestyle spaces.
The road ahead
A slowdown in Marico’s key overseas markets (West Asia, North Africa, Bangladesh and Vietnam) will limit growth in FY13. Its international operations constitute about 24 per cent of total sales. The division registered strong growth of 39 per cent in the December quarter, driven by acquisitions. However, analysts expect its growth to moderate to 14 per cent, albeit still healthy, in FY13 in the absence of acquisitions.
Overall, Marico’s earnings are estimated to grow at a compounded rate of about 25 per cent over FY12-FY14. Good growth in all segments, namely consumer products, international (double-digit volumes growth as well as margin expansion) and Kaya (strong growth in derma portfolio and double-digit same store growth) will fuel Marico’s topline growth. Further, lower input prices coupled with healthy growth in Paras’ portfolio are other positives.
