21 October 2013
Update | Sector: Consumer
Marico
BSE Sensex
20,883
S&P CNX
6,189
CMP: INR217
TP: INR240
Buy
Copra prices spike 20% in a month; short term margins at risk
Empirical evidence belies volume/market share concerns
Copra prices rose by 20% in the last one month. We analysed past instances of
such spike in copra prices and implications for Marico’s (MRCO) margins,
volume growth and market share. Following are our observations:
Copra constitutes ~40% of MRCO’s RM cost and hence is the single most
important RM in its basket.
Sensitivity of gross margins to copra prices is particularly high when
movement in copra prices is swift. Theoretically, every 10% rise in copra
prices impacts gross margins by ~200bp, unless neutralized by price hikes.
Analysis of copra prices v/s MRCO’s consolidated gross margins suggests a
direct correlation between the two. Company’s gross margins have
contracted with a lag, post an episode of sharp spike in copra prices.
During 2QFY10-1QFY12, when copra prices more than doubled, gross
margins and EBITDA margins contracted ~1,000bp and ~180bp respectively.
Similarly, when copra prices corrected ~40% between 1QFY12-2QFY13,
gross and EBITDA margins expanded ~900bp and 75bp, respectively.
MRCO enjoys strong pricing power in
Parachute,
with leadership position in
the segment. We expect the company to implement price hikes, albeit
judiciously, given the weak volume growth environment in consumer
staples. This will be in contrast to FY11-12 when MRCO hiked prices in
Parachute
portfolio by ~30% in 12 months, to pass on copra price inflation.
Volume growth in
Parachute
did not come off during that period, bearing
testimony to its superior brand equity in the segment.
Also, periods of high inflation in copra prices have typically resulted in
lowering of pricing premium of
Parachute
v/s regional/unbranded players,
resulting in shift towards branded segments. As expected, MRCO gained
market shares during such times.
Other RM such as safflower, kardi and rice bran oil are up ~2%, down 17%
and down 11% resp. v/s FY13 average. Packaging items like liquid paraffin
and HDPE are up 4% and 9%. However, on a QoQ basis, every RM is up.
We estimate 70bp EBITDA margin expansion in FY14E to 14.1%. MRCO has
posted 200bp margin expansion to 16.5% in 1QFY14. Our margin expansion
estimate is largely premised on ~300bp operating margin improvement in
international business, driven by better scale and operating leverage in the
Middle East.
Valuation and view:
Multiple growth driver model, with leadership position in
its core categories underline our positive view on MRCO. Successful integration
of Paras business provides additional catalyst in the medium term, with
expected 25% growth in the portfolio. We have a
Buy
rating on MRCO, with a
target price of INR240. Any weakness in the stock based on concerns over copra
prices will provide a buying opportunity, in our view.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
MRCO IN
644.9
251/191
-6/-8/-6
139.7
2.3
Financial Snapshot (INR b)
Y/E March
2013 2014E 2015E
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
45.8
6.1
3.9
6.0
15.6
30.5
19.6
28.8
36.2
7.1
51.9
7.3
4.8
7.5
24.4
37.1
20.1
30.0
29.1
5.9
60.3
8.6
5.5
8.6
14.9
44.7
19.2
29.9
25.3
4.9
Shareholding pattern %
As on
Sep-13 Jun-13 Sep-12
Promoter
Foreign
Others
59.7
31.3
6.6
59.7
1.8
31.7
6.9
59.8
3.3
30.1
6.8
Domestic Inst 2.5
Stock Performance (1-year)
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Investors are advised to refer through disclosures made at the end of the Research Report.