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 it. Key positives were: (i) strong 10% YoY volume surge in Parachute (2% Absolute Rating BUY 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 (% of share in issue) International business on recovery path; El Nino to have minimal impact 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 Pooja Lath Net sales 10,721 9,130 17.4 12,007 (10.7) 46,865 54,523 63,526 +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 <GO>, 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. 2 Edelweiss Securities Limited Marico 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.