RESULT UPDATE

MARICO Strong performance; re-rating likely

India Equity Research| Consumer Goods

EDELWEISS 4D RATINGS Marico’s Q4FY14 sales were in line with our estimate, but PAT surpassed Absolute Rating BUY it. Key positives were: (i) strong 10% YoY volume surge in Parachute (2% in Q3FY14) as it captured unorganised players’ pie under inflationary Rating Relative to Sector Outperformer conditions and better pricing strategy; (ii) robust 11% YoY (9% in Q3FY14) Risk Rating Relative to Sector Medium Sector Relative to Market Underweight volume surge in Saffola edible oil; (iii) 168bps YoY EBITDA margin expansion despite 522bps YoY fall in gross margin aided by 387bps YoY decline in other expenditure as strong sales and volume growth brought MARKET DATA (R: MRCO.BO, B: MRCO IN) in operating leverage; and (iv) 22% YoY growth in Bangladesh. Mere 5% CMP : INR 204 volume growth in value-added hair oil (on high base of 25%) and 24% YoY Target Price : INR 264 sales decline in South East Asia due to sluggish demand in Vietnam were 52-week range (INR) : 250 / 188 key negatives. Marico has underperformed peers Emami and Dabur ~21% Share in issue (mn) : 644.9 and~31%, respectively, and is likely to re-rate. Maintain ‘BUY’. M cap (INR bn/USD mn) : 132 / 2,187 Avg. Daily Vol.BSE/NSE(‘000) : 366.7

Confident of maintaining robust volume growth SHARE HOLDING PATTER N (%) While Parachute volumes jumped a robust 10% YoY, Saffola also clocked 11% YoY Current Q3FY14 Q2FY14 volume surge. Management is confident of achieving 8-10% YoY volume growth in Promoters * 59.7 59.7 59.7 Parachute and double digit in Saffola for couple of quarters. To counter sharp increase MF's, FI's & BK’s 6.0 5.7 5.9 in copra prices, Marico has effected total price hikes of 25% YoY till April 2014. The FII's 27.6 27.6 27.6 acquired portfolio of youth brands grew 16% YoY in FY14. Others 6.7 7.0 6.8 * Promoters pledged shares : 0.1 International business on recovery path; El Nino to have minimal impact (% of share in issue)

Marico’s international sales catapulted 21% YoY with 8% YoY constant currency PRIC E PERFORMANCE (%) growth. While Bangladesh business improved with 22% YoY growth, MENA (Middle EW Consumer East and North Africa) too clocked a robust 27% YoY surge. Vietnam, however, declined Stock Nifty goods Index 24% YoY due to sluggish demand. El Nino is expected to have minimal impact on 1 month (3.1) 0.4 (2.6) Marico as the company derives majority sales from East and South India, while El 3 months (4.5) 10.5 4.2 Nino’s impact is anticipated to be more prevalent in North and Central India. 12 months (9.3) 13.5 3.7

Outlook and valuations: Positive; maintain ‘BUY’ We remain enthused by Marico’s focus on new growth drivers like mass skin care, youth and food categories, while existing business continues to grow strongly over the medium to long term. At CMP, the stock is trading at 22.4x FY15E and 18.5x FY16E. We maintain ‘BUY/ Sector Outperformer’ recommendation/rating on the stock. Abneesh Roy +91 22 6620 3141 Financials (INR mn) [email protected] Year to March Q4FY14 Q4FY13 % change Q3FY14 % change FY14E FY15E FY16E Net sales 10,721 9,130 17.4 12,007 (10.7) 46,865 54,523 63,526 Pooja Lath +91 22 6620 3075 EBITDA 1,543 1,160 33.0 2,018 (23.6) 7,480 8,942 10,545 [email protected] Core PAT 916 670 36.7 1,417 (35.4) 5,041 6,115 7,415 Tanmay Sharma Dil. EPS (INR) 1.4 1.3 5.9 2.1 (34.4) 7.5 9.1 11.0 +91 22 4040 7586 Dil. P/E (x) 27.1 22.4 18.5 [email protected]

EV/EBITDA (x) 17.4 14.0 11.4 ROAE (%) 22.1 22.0 21.9 April 30, 2014 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Consumer Goods

Q4FY14 conference call |Key takeaways Volume growth: Marico clocked strong overall volume growth of 6% YoY (3% YoY in Q3FY14). Both domestic and international businesses recovered.

Domestic FMCG business: Domestic FMCG business grew 16% YoY in Q4FY14. Marico believes margin in the 17-18% range is sustainable in the medium term; however, this may be affected by input price fluctuations in the near term.

Parachute : Parachute Coconut Oil (rigid packs) volume grew 10% YoY (meager 2% YoY in Q3FY14); value growth was 23% YoY. Marico believes volume growth of 8-10% in Parachute is achievable in the next two quarters. The contribution of upstocking in volume growth is marginal. In an inflationary environment, the company tends to gain market from unorganised players who are not able to meet working capital requirements due to inflation. The company is confident that during an inflationary environment it can pass on input cost increase to consumers. Inflation and a combination of right pricing has helped Marico’s volume growth. It is reducing focus on non-rigid packs, which clocked flattish growth.

Saffola: Saffola volume surged 11% YoY in Q4FY14 (9% YoY in Q3FY14). Overall value growth came in at 14% YoY. Marico believes there is enough headroom for growth, particularly in mid India (between rural and urban). The company is confident of achieving double digit volume growth in this portfolio in the coming quarters. It will not get into commodity based products and will provide value added offerings, e.g., Marico initiated a new communication strategy of “High Science” campaign to establish superiority of its brand Saffola Total. The company will continue to meet the competitive intensity in this category via innovations and product mix.

Value-added hair oil : Marico’s value-added hair oil portfolio volume grew 5% YoY and value growth came in at 18% YoY in Q4FY14. Lower volume growth can be attributed to the high base of 25% YoY and also because of the slowdown in the category. Marico is the market leader in this category with 28% market share and it targeting 40% market share. Nihar Shanti Amla has now become an INR2.5bn brand and has cornered market share of 30% in the amla hair oil category. Marico is confident of achieving double digit volume growth in the coming two quarters.

Youth portfolio: The acquired portfolio of youth brands grew 16% YoY in FY14. Deodorant contributes 34% to the overall youth portfolio. Marico also launched a no gas version in Set Wet . Balance portfolio remains a key focus that include serum, gels etc., as they are high margin. Youth portfolio is ~INR2bn for the company.

Food business: Saffola clocked INR600mn in FY14. One or two new innovations are expected in FY15. The margin in savory oats is higher than in plain oats. Saffola has a market share of over 14% by volume in the oats category. Marico believes that it has the right to win in savory oats.

Structural change : Management is of the view that there is no structural change in the hair oiling pattern and believes the same cannot be derived on short-term results of hair oil companies.

Hair colour: The company believes the domestic hair colour market has matured compared to Bangladesh. The current price point of INR30-40 pack gives a vast head room for growth.

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There will be upgradation from powder to crème and downtrading from high priced crème to INR30-40 pack crème.

Rural contribution: 32%.

Penetration : Penetration of branded hair oil is slightly lower than shampoos.

El Nino impact: The impact of El Nino will be more in North and Central India while Marico derives majority of its sales from the East and South India.

Modern trade: Modern trades rose 16% YoY in Q4FY14; it contributed 9% to domestic turnover.

Price increase by competition: Unorganised players pass on complete increased input cost to consumers and price hikes by them can be of around 40 to 45%.

International business : International business jumped 21% YoY with constant currency sales growth of 8% YoY in Q4FY14. Marico believes sustainable margin in international business is in the 14-15% range and also that 15-20% YoY constant currency growth is achievable. Growth in international business will be driven by recovery in the Middle East (expected to recover fully in FY15), good growth in Egypt and entry into new markets like Malaysia, Myanmar and Cambodia.

Bangladesh surged 22% constant currency with overall volume growth of 13% YoY. Growth in Bangladesh was also helped by the low base in Q4FY13. Marico believes 15-20% growth should come from the organic business. The company continues to invest in this geography in brands, marketing, innovation and R&D. Marico intends to reduce dependence on Parachute coconut oil by increasing the share of other products.

MENA achieved constant currency growth of 27% YoY in Q4FY14 riding strong 30% YoY growth in Egypt while GCC has shown signs of revival posting 23% YoY constant currency growth.

Business was impacted in South East Asia that constitutes Vietnam and the business declined 24% YoY in constant currency terms in Q4FY14. The economy in Vietnam is going through tough times, which has affected consumption demand. Marico expects the Vietnam business to remain sluggish, though it may achieve some growth in FY15. Competitive intensity has increased in Vietnam and Marico has lost market share of 1% in shampoos under X-Men and 2-3% in deodorants as consumers are converting from the use of roll-ons to sprays.

Gross margin: Marico’s gross margin plummeted 522bps YoY due to input costs pressure riding sharp rise in copra prices. The company has taken overall price increase of 25% YoY till April 2014 to counter the increase in copra prices compared to April 2013. Weighted average price increase of 9% YoY and 4% YoY was taken in Q2FY14 and Q3FY14, respectively, while it increased prices 12% YoY in April 2014. Marico believes the current high prices of copra are not sustainable and the company is watchful of the same. Another price hike will depend on market conditions and input prices as the company maintains a threshold level of margin.

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Other costs: The other costs have fallen because of reduction in rent expenses, legal and professional expenses and exchange related gains.

Dividend from Bangladesh: Marico received dividend of 900% from Marico Bangladesh on which income tax of INR345mn has been booked in books. This dividend was a way to repatriate the huge cash profit that was accruing in the Bangladesh business due to good growth. Also, Marico gave a special one-time dividend of 175% on the company’s Silver Jubilee.

Q3FY14 conference call |Key Takeaways Volume growth: remained muted at 3% YoY; likely to revive to 6-7% in coming two quarters as Marico believes that volumes have bottomed out. While recovery in urban volumes is likely to be slow and steady, rural volume growth is likely to continue at similar pace.

Rural urban split: Rural growth at 16-18% continued to outpace urban growth (at 6-7%). Rural contribution is 31% to sales which Marico intends to increase to 35%. While modern trade grew at 13-14%, CSD sales declined 3% YoY.

Value-added hair oil : Despite deceleration in VAHO volume grew 8% YoY (in line with drop in volumes for consumer goods category at large due to high inflationary pressure). Shanti Amla volumes grew 31.4% YoY and maintained 30% market share in the amla hair oil category in CY13. Marico intends to exploit complete potential in the space (enter all sub- categories), but avoid a commodity play and plans to always emphasise on customer-centric innovations.

Saffola : Saffola clocked 9% YoY volume growth and maintained market share. It initiated a weighted average price increase of 4-5% in Q3FY14 to offset rise in input cost and packaging materials which the company believes will be easily absorbed. Marico expects Saffola volumes to grow at 10% plus going forward. Management believes that to be a successful, an edible oil brand one needs to create brand pull rather than be a commodity play, as is being seen in rice bran.

Parachute : Volume grew meager 2% YoY in Parachute rigid packs. Volume pressure in Q4FY13 and Q1FY14 was due to delayed pricing action (when peers took price cuts). The muted volume performance is attributable to three pricing actions (two hikes and a drop) taken in just four months that led to multiple price units available in market.

In a normal scenario, raw material inflation bodes well for Marico in terms of market share (puts pressure on working capital requirements of marginal players keeping them at bay). However, the current price hike has impacted volumes due to food inflation and increased price volatility. Post settlement of prices in the market, volumes are likely to revive. Marico is not looking at initiating pricing action in Parachute for the next two-three months irrespective of copra price movement.

During Q4FY13 and Q1FY14 downward price corrections (to pass on part of input cost benefit to the consumer) followed by 11% price hike in Q3FY14 leads to an effective price hike of 4%-5% YoY. Full impact of current price hike will be visible in Q4FY14 (11-12%; only some impact seen in December in Q3FY14).

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Marico is not planning further pricing action to revive volume growth. The company intends to maintain margins at levels sustainable to drive volume growth and maintain share. Volumes are likely to recover to 5-6% in the near term due to uptrading from loose pack usage (which can be delayed if food inflation rises further).

Parachute’s market share from modern trade has increased slightly over the years. Loose oil likely forms 35% of the coconut oil market (its share likely increased in past one year due to volatility in prices). Parachute’s contribution from urban is 56%.

The 20-ml pack price has been increased to INR7 (INR6 earlier); contributes to less than 1% of Parachute sales; management is defocusing on this pack as it is focusing on margin protection in this pack (in face of sharp raw material inflation). The 20ml pack is not the recruiter pack and hence not likely to affect Parachute sales; INR10 pack is the recruiter pack.

Hair colour : Marico, in January 2014, entered the hair colour segment with Livon Conditioning Cream Colour , priced at INR39 and available in three colours with two SKUs. This offering will help customers upgrade from powders to creams due to affordable price points. Marico will support the new launch with adequate ad spends. The product is domestically manufactured and currently available in all urban markets.

Bio-oil : is a niche and differentiated premium skin care product (priced at INR450 for 60 ml) intended to improve the appearance of scars and stretch marks, and provide benefits such as even skin tone. The product will help in developing chemist channel presence and sales of youth brands. Marico considers chemist channel a huge opportunity to drive urban growth (channel of future) and plans to have direct distribution in these channels in coming years.

Foods: Marico intends to grow in the value-added foods space and avoid commodity play (like plain oats) as the differentiated product helps clocking attractive margin (due to enhanced taste and differentiation). Oats will evolve into an in-between meal space as well. Marico is targeting consumer delight and managing costs well to attain good margins in the foods space. Saffola has a better right to win in the healthy space than any other player because of its brand equity. Marico is likely to further invest and focus on innovation in the healthy breakfast space. Foods is currently an ~INR600mn business and the company expects the foods business to clock ~INR1bn revenue in FY15E (largely driven by oats).

Youth portfolio : grew 21% YoY YTD14 (to grow at 20-25% going ahead) with 13% LTL growth. The company has market share of ~44% and ~81% in hair gels and post wash leave- on conditioner, respectively. The portfolio is likely to grow at 20-25% going ahead.

Deodorant brands (contributing ~33% to youth portfolio) gained 40bps YoY market share (5%). Hyper competition exists in this space. Marico has successfully regained the lost market share and is now working on gaining market share.

International business : International sales grew 15% YoY with 3% YoY constant currency and volume growth. Normalised growth is expected to be 15-20% in constant currency terms.

Bangladesh : Bangladesh sales declined 14% YoY in constant currency, but lower ad spends and gross margin expansion led to 22% YoY surge in profit. Sales decline was primarily due

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to lack of availability of products in the market due to more than 40 days of hartals (no reduction in consumption pattern). Marico believes that the worst is over in Bangladesh and Q4FY14 appears to perform better. Marico wants to reduce dependence on one category and continues to invest in existing and new products such as VAHO, hair dyes, deodorants, leave-on conditioners and premium edible oils. Irrespective of the political situation in Bangladesh, Marico intends to continue to focus on innovation, increase investments in ad spends and diversify its portfolio as it believes Bangladesh has long-term consumption growth potential and the company is well placed to tap it (consumer companies have the potential to grow at twice the GDP growth rate).

Middle East : grew 10% YoY in constant currency terms with 22% YoY surge in Egypt (led by strong volume growth in Hair Code and Fiancée) and decline in GCC business. Full recovery is expected in FY15 with revamped model and new management in place.

EBITDA margin : Consolidated EBITDA margin increased 212bps YoY to 16.8% despite gross margin dip primarily due to lower ad spends (down 279bps YoY due to phasing out of ad spends in both domestic and international business; to be maintained at 12.5% going ahead to aid volume growth and support new launches) and 83bps YoY drop in other expenses. EBITDA margin is likely to be maintained at ~14% going ahead and any benefit will be ploughed back to grow volumes and market share. Downside risk to the ~14% guidance is inflation in raw material prices (looks unlikely as fresh copra stock will come shortly).

The company has initiated cost transformation exercise which will help source beneficially, rationalise below the line spends and bring in cost efficiencies in business with the aid of smart analytics. Similarly, by extending the cost transformation exercise to international business, the company is confident of improving margin to 14%.

Staff costs : declined 15.7% QoQ as in Q2FY14 there was one-off (VRS paid for Goa plant). The Q3FY14 run rate is the normal staff cost going forward.

Depreciation : jumped 29.4% YoY due to provision for impairment of assets in Goa and Dehradun plants (for some parts of machinery which are unusable) to the extent of INR40mn.

Interest income: Increased 102.2% YoY due to rise in surplus in domestic and international businesses (income from dividend in Bangladesh subsidiary).

Key developments Marico made management changes and appointed CEO Saugata Gupta as MD of the company after promoter Harsh Mariwala stepped down as MD though he will continue as chairman of the company. Group CFO, Milind Sarwate also resigned from the company.

The company is going aggressive in its new hair colour, Livon hair colour. The advertisement focuses on ease of crème hair colour and asks consumers to bid goodbye to powdered hair colours. The product comes at price points of INR39 and INR59 (bigger pack).

L’Oreal launches hair oil • L’Oreal India has launched LOreal Paris 6 Oil Nourish Extraordinary Hair Oil .

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• Product description as per an online site: “The Extraordinary Oil has been scientifically created to give your hair the nourishment it truly deserves with three traditional oils and three exotic oils providing 6 specific benefits. It has no heavy feel or greasy look. Almond oil –Makes your hair thick; Coconut oil – Makes your hair manageable; Argan oil –Gives your hair strength; Jojoba oil –Gives you shiny hair; Olive oil – Makes your hair soft; Camelina oil –Smoothens your hair.”

• This is a premium hair oil as it is priced at INR199 for 100ml.

• Prices can be compared to the premium Dove Elixir Hair oil which is priced at INR185 for 90ml bottle (equivalent to INR206 for 100ml).

• 100ml Bajaj Almond Drop Hair Oil bottle is priced at INR58. 75ml bottle of Clinic Vita Oil is priced at INR40 (so effectively, a 100ml bottle is priced at INR53.33).

GCPL – Hair colour performance • The segment logged 16% YoY sales growth and was impacted by anniversary of Crème launch.

• GCPL’s many initiatives in the segment included re-launch of Advanced Gel in new packaging, launch of new ad campaign for Godrej Expert Crème and launch of twin use pack for Crème.

• All growth in segment was driven by volumes as company did not take any price hike.

• Company believes it will see lot more growth in rural areas where penetration is low. It is confident of sustaining its growth rate riding on quality and marketing strength.

Dabur Hair care performance • Hair Care portfolio grew by 6% YoY in Q4FY14 with shampoo portfolio registering 19% YoY growth.

• New products like Vatika Enriched Coconut Oil with Hibiscus and Vatika Olive Enriched Hair Oil received good consumer response.

• Hair Oil category has reached maturity and is not likely to revive to double digit growth given high penetration levels.

Bajaj Corp performance • Bajaj Corp’s volume declined for first time ever by 6.4% YoY affected by slowdown in the hair oil space and rural consumption.

• Ad spends fell 24.4% to INR102mn (5.5% of net sales). The company expects to increase its advertising and promotional activities in the future.

• Took price in Bajaj Almond Drop Hair Oil by ~5%.

Outlook and valuations: Positive; maintain ‘BUY’ We like Marico’s sharpened focus on new growth drivers like skin care, food categories (oats, muesli) and youth brands (deodorants, hair gels, hair creams, hair colour), which have been growing at a fast clip, and expect slow and steady revival in its core category—hair oil. The stock has underperformed peers Emami and Dabur ~21% and ~31%, respectively, in the past one year and is trading cheaper at 18.5x FY16E compared to Emami and Dabur, which

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are trading at 20.7x FY16E and 25.0x FY16E, respectively. We expect the stock to re-rate riding its strong performance, both on volume and profit fronts. We arrive at a target price of INR264 (at 24x FY16E) and maintain ‘BUY’ and rate it ‘Sector Outperformer’ on relative return basis.

Table 1: Summary of growth Share of Group’s Reported growth in Turnover basis FY13 Category / Business Q4FY14 (%) results Group: total reported value growth 17.0 FMCG business (India) 6.0 75.0 Parachute coconut oil in rigid packs 10.0 23.0 Value added hair oil 5.0 18.0 Saffola (refined edible oil) 11.0 15.0 International business group: total 21.0 25.0 Source: Company , Edelweiss research

Table 2: Marico's market share (volume) position Indicative market share Brands Category range % Rank Parachute and Nihar Coconut Oils (India) 56.0 1 Parachute Advansed, Nihar, Hair Oils (India) 28.0 1 Hair & Care Saffola Super Premium refined 55.0 1 Edible Oils

Set Wet and Zatak Deodorants (India) 5.0 5 Livon and Silk & Shine Post wash Leave– On 81.0 1 Set Wet and Parachute after Hair Creams/Gels 33.0 1 shower* Parchute (Bangladesh) Coconut Oil (Bangladesh) 84.0 1 X-Men* Men's shampoo (Vietnam) 39.0 1 Hair Code & Fiancee* Hair care (Egypt) 52.0 1 Source: Company, Edelweiss research * Value market shares

Table 3: Volume growth in sales of key business (%) Key business Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 CPB (India) 14.0 20.0 17.0 14.0 14.0 9.0 8.0 10.0 4.0 3.0 6.0 Parachute coconut oil in rigid packs 10.0 13.0 11.0 18.0 9.0 6.0 5.0 4.0 1.0 2.0 10.0 Value added hair oil 26.0 20.0 18.0 25.0 20.0 30.0 25.0 16.0 15.0 8.0 5.0 Saffola 11.0 15.0 3.0 12.0 6.0 4.0 5.0 10.0 7.0 9.0 14.0 International 19.0 39.0 37.0 17.0 16.0 - (1.0) 9.0 4.0 3.0 8.0 Source: Company, Edelweiss research * Reported value growth (% YoY) in INR

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Table 4: Standalone business performance (INR mn) Q4FY14 Q4FY13 % YoY change Q3FY14 % QoQ change Net Sales 8,503 7,313 16.3 9,282 (8.4) Other Op. Income 19 10 86.9 20 (3.1) Total 8,522 7,323 16.4 9,302 (8.4) COGS 4,740 3,595 31.9 5,078 (6.7) Employee cost 346 355 (2.7) 426 (18.9) Advt. and promotion 947 880 7.6 1,040 (8.9) Other Expenditure 1,337 1,421 (5.9) 1,342 (0.4) Total expenses 7,370 6,252 17.9 7,886 (6.5) EBITDA 1,152 1,072 7.5 1,416 (18.7) Depreciation 127 75 69.3 136 (7.1) EBIT 1,025 997 2.9 1,280 (19.9) Other inc 1,174 76 1,449.5 560 109.6 Interest net 56 91 (38.0) 63 (10.8) Exceptional Items 465 NM NM PBT 2,143 1,447 48.1 1,777 20.6 Tax 372 341 NM 359 3.6 PAT 1,771 1,106 60.1 1,418 24.9 EPS 2.75 1.72 59.9 2.20 25.0

As % of net sales COGS 55.6 49.1 654 54.6 104 Employee 7.3 9.9 (259) 8.4 (110) Advt.and promotion 11.1 12.0 (91) 11.2 (6) Other expenditure 15.7 19.4 (372) 14.4 126 EBITDA 13.5 14.6 (112) 15.2 (171) PAT 20.8 15.1 568 15.2 554 Tax Rate 4.4 4.7 (30) 3.9 50 Source: Company, Edelweiss research

Table 5: International FMCG business Factor Q4FY14 YoY growth % Reported Growth 21.0 Volume/Value growth 8.0 Exchange Rate impact 12.0 Turnover (INR mn) 2,600.0 Source: Company , Edelweiss research

Table 6: International business split Region Reported growth % YoY Bangladesh 22.0 Middle East and North Africa 27.0 South Africa 11.0 South East Asia (24.0) Source : Company, Edelweiss research

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Chart 1: 1 year forward PE band – likely to re-rate 300 30x

240 25x

180 20x

15x (INR) 120 10x 60 5x

0 08 09 10 11 12 13 08 09 10 11 12 13 14 ------Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr Source: Edelweiss research

Table 7: Balance Sheet (Standalone) (INR mn) As on Q4FY14 Q4FY13 Sources of funds Share capital 645 645 Reserves and surplus 12,961 19,170 Shreholders fund 13,606 19,815 Minority interest 358 351 Long term borrowings 2,515 4,326 Deffered tax liability (net) 96 58 Other long term liabilities 0 10 Long term provisions 33 105 Non-current liabilities 2,645 4,499 Short term borrowings 2,744 3,581 Trade payables 5,025 4,785 Other current liabilities 4,448 2,933 Short term provisions 824 1,109 Current liabilities 13,040 12,407 Total sources of funds 29,650 37,072 Uses of funds Fixed assets 6,378 14,224 Goodwill on consolidation 2,542 3,955 Non-current investments 499 380 Long term loans & advances 609 1,194 Other non-current assets 1,550 1,426 Total non-current assets 11,578 21,180 Current investments 2,607 1,136 Inventories 7,962 8,627 Trade recievables 2,232 1,966 Cash and cash equivalents 4,064 2,667 Short term loans and advances 865 1,361 Other current assets 342 136 Total current assets 18,071 15,892 Total uses of funds 29,650 37,072 Source : Company, Edelweiss research

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Financial snapshot (INR mn) Year to March Q4FY14 Q4FY13 % change Q3FY14 % change FY14 FY15E FY16E Net revenues 10,721 9,130 17.4 12,007 (10.7) 46,865 54,523 63,526 Cost of goods sold 5,597 4,290 30.5 6,206 (9.8) 23,992 27,643 31,890 Gross profit 5,123 4,840 5.9 5,801 (11.7) 22,874 26,880 31,636 Staff costs 651 660 (1.3) 679 (4.1) 2,847 3,326 3,939 Advt. sales & promotions 1,219 1,210 0.7 1,341 (9.1) 5,612 6,434 7,560 Other expenses 1,710 1,810 (5.5) 1,763 (3.0) 6,935 8,178 9,592 Total exp. (excl. cogs) 3,581 3,680 (2.7) 3,783 (5.3) 15,394 17,938 21,091 EBITDA 1,543 1,160 33.0 2,018 (23.6) 7,480 8,942 10,545 Depreciation & amortization 215 200 7.7 207 4.1 769 816 850 EBIT 1,327 960 38.3 1,811 (26.7) 6,711 8,126 9,696 Other income 128 210 (38.8) 180 (28.8) 579 716 962 EBIT including other income 1,456 1,170 24.4 1,991 (26.9) 7,290 8,841 10,657 Interest 68 100 (32.5) 73 (7.6) 345 349 358 Profit before tax 1,388 1,070 29.7 1,918 (27.6) 6,946 8,493 10,299 Tax 473 400 18.1 501 (5.8) 1,905 2,378 2,884 Core profit 916 670 36.7 1,417 (35.4) 5,041 6,115 7,415 Extraordinary items - 470 NM - - - - Minority interest (28) (26) NA (63) NA (187) (251) (311) Net profit 888 1,114 (20.3) 1,354 (34.4) 4,854 5,864 7,104 Diluted EPS (INR) 1.4 1.3 5.9 2.1 (34.4) 7.5 9.1 11.0

As % of net revenues COGS 52.2 47.0 51.7 51.2 50.7 50.2 Employee cost 6.1 7.2 5.7 6.1 6.1 6.2 Adv. & sales promotions 11.4 13.3 11.2 12.0 11.8 11.9 Other expenditure 16.0 19.8 14.7 14.8 15.0 15.1 EBITDA 14.4 12.7 16.8 16.0 16.4 16.6 EBIT 12.4 10.5 15.1 14.3 14.9 15.3 EBIT incl. other income 13.6 12.8 16.6 15.6 16.2 16.8 PBT 12.9 11.7 16.0 14.8 15.6 16.2 Adjusted net profit 8.3 12.2 11.3 10.4 10.8 11.2 Tax rate 34.0 37.4 26.1 27.4 28.0 28.0

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Company Description Marico has evolved into one of the leading Indian FMCG companies from a coconut oil manufacturer over the past few years. It has positioned itself on the beauty and wellness platform and caters to hair care, health care, and skin care. Its brands include Parachute , Nihar , Hair & Care, and Fiancee in hair care, Saffola and Ingwe in health care. The company has been at the forefront of launching innovative products and services such as Saffola Cholesterol Control Atta Mix, Bio-fuel to provide Indian consumers with premium personal care products. Over the past two years, Marico has captured inorganic growth opportunities to spread its base across geographies and increase the range of products at its disposal. It has acquired two hair care brands in Egypt, Fiancee and Haircode , which give it control of 50% of the hair care market in the country. Further, it has acquired three soap brands in Bangladesh and cross pollinated brands (value-added hair oils, hair dyes) to expand its presence there. Marico acquired Paras Personal Care Business giving Marico access to brands like Set Wet, Livon and Zatak, ranked amongst top three in respective categories. Acquisition of this business is likely to reduce Marico’s dependence on edibles oils and hair oils besides giving it an opportunity to participate in the rapidly growing categories in India. Recent demerger of Kaya business has made Marico a pure-FMCG play.

Investment Theme Marico is amongst the leading beneficiaries of the changing preference of Indian consumer for better personal care and food products. The company has been able to distinguish itself by offering niche products through brands such as Saffola, Livon while extending Parachute to various new generation hair care products such as hair creams and value-added hair oils.

Key Risks Coconut oil forms the biggest share of Marico’s top line and bottom line. Copra prices have been hardening over the past few months. A greater-than-expected inflation can hurt the bottom line substantially.

Appreciation of rupee against Egyptian pound, Bangladeshi taka and other international currencies puts the growth in revenues and profits at risk.

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Financial Statements

Key Assumptions Income statement (INR mn) Year to March FY13 FY14E FY15E FY16E Year to March FY13 FY14 FY15E FY16E Macro Net revenue 45,962 46,865 54,523 63,526 GDP(Y -o-Y %) 5.0 4.8 5.4 6.3 Materials costs 22,099 23,992 27,643 31,890 Inflation (Avg) 7.4 6.2 5.5 6.0 Gross profit 23,863 22,874 26,880 31,636 Repo rate (exit rate) 7.5 8.0 7.8 7.3 Employee costs 3,806 2,847 3,326 3,939 USD/INR (Avg) 54.5 62.0 60.0 58.0 Other Expenses 7,820 6,935 8,178 9,592 Company Advertisement & sales costs 5,979 5,612 6,434 7,560 Revenue growth (Y -o-Y %) EBITDA 6,258 7,480 8,942 10,545 International business growth 13.5 4.0 8.0 10.0 Depreciation & Amortization 866 769 816 850 Hair oil sales growth 30.9 4.0 18.0 14.0 EBIT 5,392 6,711 8,126 9,696 Edible oil sales growth 6.3 7.0 14.0 15.0 Other income 375 579 716 962 EBITDA margin assumptions EBIT incl. other income 5,767 7,290 8,841 10,657 Oil Seeds (Copra and kardi seeds) as % of COGS 30.0 34.0 34.0 34.0 Interest expenses 580 345 349 358 Raw Oil (Other than copra and kardi seeds) as % of 23.0 22.0 22.0 22.0 Profit before tax 5,187 6,946 8,493 10,299 COGS as % of sales (Consol) 48.1 51.2 50.7 50.2 Provision for tax 1,462 1,905 2,378 2,884 Staff costs as % of sales (Consol) 8.3 6.1 6.1 6.2 Net profit 3,725 5,041 6,115 7,415 Financial assumptions Extraordinary income/ (loss) 332 - - - Tax rate (%) 28.2 27.4 28.0 28.0 Minority interest (98) (187) (251) (311) Capex (INR mn) 8,361 (152) 675 750 Profit after minority interest 3,959 4,854 5,864 7,104 Debtor days 16 16 16 16 Shares outstanding (mn) 641 645 645 645 Inventory days 131 125 125 125 Diluted EPS (INR) 5.7 7.5 9.1 11.0 Payable days 69 75 74 74 Dividend per share (INR) 0.5 0.8 0.9 1.1 Cash conversion cycle (days) 78 66 67 67 Dividend payout (%) 8.1 10.0 10.0 10.0 Interest rate on o/standing debt (%) 7.0 4.9 7.0 8.0

Depreciation as % of gross block 6.8 4.4 4.5 4.5 Common size metrics Dividend as % of net profit 8.1 10.0 10.0 10.0 Year to March FY13 FY14 FY15E FY16E Yield on cash 9.0 12.5 11.0 9.0 Materials costs 48.1 51.2 50.7 50.2 Employee expenses 8.3 6.1 6.1 6.2 Advertising & sales costs 13.0 12.0 11.8 11.9 EBITDA margins 13.6 16.0 16.4 16.6 Net profit margins 7.9 10.4 10.8 11.2

Growth ratios (%) Year to March FY13 FY14 FY15E FY16E Revenues 15.5 2.0 16.3 16.5 EBITDA 29.2 19.5 19.5 17.9 Net profit 24.8 22.6 20.8 21.1 EPS 9.1 33.1 20.8 21.1

13 Edelweiss Securities Limited Consumer Goods

Balance sheet (INR mn) Cash flow metrics As on 31st March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E Equity capital 645 645 645 645 Operating cash flow 4,319 6,582 6,406 7,635 Reserves & surplus 19,170 23,446 28,610 34,869 Investing cash flow (8,299) 152 (675) (750) Shareholders funds 19,815 24,091 29,255 35,513 Financing cash flow 4,423 (4,412) (1,549) (1,704) Minority interest (BS) 351 539 789 1,101 Net cash flow 442 2,322 4,182 5,182 Borrowings 8,719 5,229 4,729 4,229 Capex (8,361) 152 (675) (750) Deferred tax liability 58 58 58 58 Dividends paid (385) (578) (700) (845) Sources of funds 28,943 29,916 34,831 40,901

Tangible assets 4,618 4,599 4,533 4,433 Profitability & efficiency ratios Intangible assets 8,130 8,130 8,130 8,130 Year to March FY13 FY14 FY15E FY16E CWIP (incl. intangible) 1,477 575 500 500 ROAE (%) 23.2 22.1 22.0 21.9 Total net fixed assets 14,224 13,304 13,163 13,063 ROACE (%) 24.6 24.0 26.3 26.7 Goodwill on consolidation 3,955 3,955 3,955 3,955 Inventory day 131 125 125 125 Non current investments 380 380 380 380 Debtors days 16 16 16 16 Current Investments 1,136 1,136 1,136 1,136 Payable days 69 75 74 74 Cash and equivalents 2,668 4,990 9,172 14,354 Cash conversion cycle (days) 78 66 67 67 Inventories 8,627 8,216 9,467 10,921 Current ratio 2.3 2.5 2.9 3.4 Sundry debtors 1,966 2,093 2,390 2,785 Debt/EBITDA 1.4 0.7 0.5 0.4 Loans and advances 2,555 2,555 2,555 2,555 Debt/Equity 0.4 0.2 0.2 0.1 Other current assets 1,562 1,562 1,562 1,562 Adjusted debt/equity 0.4 0.2 0.2 0.1 Total current assets (ex cash) 14,709 14,426 15,973 17,822 Interest coverage 9.3 19.5 23.3 27.1 Trade payable 4,785 4,930 5,604 6,465

Others current liabilities 3,345 3,345 3,345 3,345 Operating ratios Total current liabilities & 8,129 8,274 8,949 9,810 Year to March FY13 FY14 FY15E FY16E Net current assets (ex cash) 6,580 6,151 7,024 8,012 Total asset turnover 1.9 1.6 1.7 1.7 Uses of funds 28,943 29,916 34,831 40,901 Fixed asset turnover 5.3 3.7 4.3 5.0 Book value per share (INR) 44.9 46.4 54.0 63.4 Equity turnover 2.9 2.1 2.0 2.0

Free cash flow (INR mn) Valuation parameters Year to March FY13 FY14 FY15E FY16E Year to March FY13 FY14 FY15E FY16E Net profit 3,959 4,854 5,864 7,104 Diluted EPS (INR) 5.7 7.5 9.1 11.0 Add : Non cash charge 1,312 1,300 1,415 1,520 Y-o-Y growth (%) 9.1 33.1 20.8 21.1 Depreciation 866 769 816 850 CEPS (INR) 7.1 9.0 10.7 12.8 Gross cash flow 5,271 6,154 7,279 8,623 Diluted PE (x) 36.1 27.1 22.4 18.5 Less: Changes in WC 952 (428) 873 988 Price/BV (x) 4.5 4.4 3.8 3.2 Operating cash flow 4,319 6,582 6,406 7,635 EV/Sales (x) 3.0 2.8 2.3 1.9 Less: Capex 8,361 (152) 675 750 EV/EBITDA (x) 21.9 17.5 14.2 11.5 Free cash flow (4,042) 6,734 5,731 6,885 Dividend yield (%) 0.2 0.4 0.4 0.5

Peer comparison valuation Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%) Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E Marico 2,187 22.4 18.5 14.0 11.4 22.0 21.9 Bajaj Corp 516 19.9 18.0 13.5 11.7 27.9 28.1 Dabur 5,196 29.6 25.0 22.6 18.8 35.4 34.1 Emami 1,795 24.1 20.7 19.9 16.7 45.0 44.2 Godrej Consumer 4,518 29.7 24.3 20.7 17.1 22.3 23.5 Hindustan Unilever 20,404 30.8 27.9 22.2 19.8 85.6 74.4 ITC 45,053 26.6 23.1 17.3 14.9 37.1 38.2 AVERAGE - 27.8 23.9 19.3 16.5 47.1 45.5 Source: Edelweiss research

14 Edelweiss Securities Limited Marico

Additional Data

Directors Data Harsh Mariwala Chairman & Managing Director (Promoter) Nikhil Khattau Chairman of Audit Committee, Non -Executive and Independent Director Rajeev Bakshi Non -Executive and Independent Director Atul Choksey Non -Executive and Independent Director Anand Kripalu Non -Executive and Independent Director Rajendra Mariwala Non -Executive Director (Promoter) Hema Ravichandar Non -Executive and Independent Director B. S. Nagesh Non -Executive and Independent Director

Auditors - Price Waterhouse; Internal Auditors: Ernst & Young *as per last annual report

Holding – Top10 Perc. Holding Perc. Holding Arisaig Partners Asia Pte Ltd 5.5 Oppenheimerfunds Incorporated 4.1 First State Investments Icvc 4.1 Indivest Pte Ltd 3.4 Arctic Investments Pty Ltd 1.4 Franklin Resources 1.3 Templeton Asset Mgmt 1.2 Baring India 1.1 Frostrow Capital 0.7 Coupland Cardiff 0.6 *as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 09 Jan 2014 First State Investment Management (UK) Limited & First State Investment International Limited Buy 1092211.00 04 Dec 2013 Harsh Mariwala Buy 200000.00 04 Dec 2013 Harsh C. Mariwala Buy 200000.00 04 Dec 2013 Kishore Mariwala Sell 200000.00

*in last one year

15 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Asian Paints BUY SP M Bajaj Corp HOLD SU H Colgate HOLD SP M Dabur BUY SO M Emami BUY SP H GlaxoSmithKline Consumer HOLD SP M Healthcare Godrej Consumer BUY SP H Hindustan Unilever REDUCE SU L ITC BUY SO L Marico BUY SO M Nestle Ltd HOLD SU L Pidilite Industries BUY SP M United Spirits BUY SP H

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

16 Edelweiss Securities Limited Marico

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400 , Email : [email protected] Vikas Khemani Head Institutional Equities vikas.khemani@edel weissfin .com +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Consumer Goods Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits

Recent Research

Date Company Title Price (INR) Recos

30 -Apr -14 Bajaj Corp Volumes challenging but 210 Hold market share improves; Result Update 30 -Apr -14 Dabur Volumes resilient; innovations 178 Buy India to spur growth; Result Update 29 -Apr -14 GCPL Margin and HI shine; HC 785 Buy slows; Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 133 40 16 190 Buy appreciate more than 15% over a 12-month period * 1 stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12 -month period Market Cap (INR) 126 55 9

17 Edelweiss Securities Limited Consumer Goods

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18 Edelweiss Securities Limited Marico

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