Marico (MARLIM) 255. Quarterly blip; growth story stays intact. Result Update. ICICI Securities Ltd Retail Equity Research.

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1 Result Update Rating matrix Rating : Buy Target : 33 Target Period : months Potential Upside : 19% What s changed? Target Unchanged EPS FY17E Changed from 6.6 to 6.3 EPS FY18E Changed from 7.9 to 6.8 EPS FY19E 7.9 Rating Unchanged Quarterly performance Q3FY17 Q3FY16 YoY (%) Q4FY16 QoQ (%) Sales EBITDA EBITDA (%) bps bps PAT Key financials Crore FY16 FY17E FY18E FY19E Net Sales 6,14.8 6,35.1 6, ,694.7 EBITDA 1,51.4 1, , ,396.6 Net Profit ,22.8 EPS ( ) Valuation summary FY16 FY17E FY18E FY19E P/E Target P/E Div. Yield Mcap/Sales RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 32,913. Total Debt (FY16) ( Crore) Cash and Investments (FY16) ( Crore) EV ( Crore) 32, week H/L 37 / 216 Equity capital 129 Crore Face value 1 Price performance Marico Dabur GCPL HUL Research Analyst Sanjay Manyal sanjay.manyal@icicisecurities.com Tejashwini Kumari tejashwini.kumari@icicisecurities.com February 3, 217 Marico (MARLIM) 255 Quarterly blip; growth story stays intact Marico reported 7.5% YoY decline in consolidated sales for the quarter to 1414 crore (I-direct estimate: crore) marred by demonetisation in the domestic market and a subdued performance of the international business. India business witnessed a 4% volume on account of a) consumption impact due to currency crunch and b) significant pipeline reduction due to disruption in wholesale channel. Despite an adverse environment, Saffola clocked 6% YoY volume growth during the quarter. However, Parachute, value added hair oil segment reported volume decline of 1% and 12% YoY, respectively Due to sustained low copra prices, raw material to sales witnessed a 7 bps decline. The company undertook a marginal reduction in advertisement expense to 1.7% (down 4 bps YoY) which got offset by higher employee & overhead expenditure. Thus, operating margin was at 19.2%, up 3 bps YoY vs. our estimate of 17.3% Net profit de-grew 6.8% to crore in-line with sales against our expectation of crore) Volume growth across segments to drive revenue Led by Marico s strong brand equity, volume growth across its key product portfolio, Parachute coconut oil rigid packs (27% of sales), Saffola refined oil (14% of sales) & value added hair oils (2% of sales) remained elevated during FY8-12. However, it was impacted Q3FY13 onwards, witnessed constant stress due to slowdown in consumption demand in the economy and a steep decline in urban discretionary demand. However, with increase in the growing health consciousness among consumers, Saffola s volume clocked 6% growth for the quarter. Though demonetisation impacted volume growth for Parachute and VAHO portfolio during the quarter, we remain upbeat on the segments going forward supported by end of deflationary cycle, premiumisation and product innovation. We believe Marico s growth would largely be driven by volumes, going forward with the large opportunity in the underpenetrated refined edible oil segment. We believe a revival in discretionary demand and improving economic scenario would drive growth in all segments in FY18-19E. Strengthening in higher growth categories Led by Marico s strong brand equity in its two flagship brands, Parachute (associated with nourishment & purity) and Saffola (associated with health & wellness), the company has successfully extended its brands into higher growth and underpenetrated categories, like, VAHO (Parachute Advansed), body lotions (Parachute body lotion) and breakfast cereals (Saffola Oats and muesli). Further, the company s acquisition of youth brands, Set Wet and Zatak (deodorants) and Livon (hair care) provide it a platform to grow in the segments of future through already established brand equity. Marico has also extended the presence of Livon to the hair colour segment that is experiencing robust growth in India. Thus, led by Marico s strong brand equity & entry into higher growth segments, the growth outlook remains promising for the company. Earnings growth momentum continues; maintain BUY We expect Marico to report healthy revenue and PAT CAGR of 8.6% and 12.2%, receptively, in FY16-19E. We remain optimistic on the company s growth outlook and reiterate our BUY recommendation on the stock with a target price of 33. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY17 Q3FY17E Q3FY16 YoY (%) Q2FY17 QoQ (%) Comments Net Sales 1,414. 1, , , Revenue declined by 7.5% YoY led by 9% YoY decline in the domestic busienss. International segment remained flat Operating Income Raw Material Expenses RM costs reduced by 74 bps YoY to 48.5% of net sales led by lower copra prices Employee Expenses SG&A Expenses Advertisement expense was down 4 bps YoY to 1.7% Other operating Expenses Increased by 52 bps YoY EBITDA Lower sales led to sharp decline in EBITDA EBITDA Margin (%) bps bps Lower RM and advertisment cost offset by higher employee and overhead expense Depreciation Interest Other Income Exceptional Income/(Expenses)... NA. NA Minority Interest... NA. NA PBT Tax Outgo PAT Net profit declined in sync with the decline in revenue Key Metrics (%) Domestic Volume Growth De-stocking and liquidity crunch amid demonetisation impacted the domestic growth Parachute Volume Growth Saffola Volume Growth Continued traction due to large exposure to modern trade VAHO Volume Growth Discretionery nature of products and significant de-stocking led to sharp decline in volumes Change in estimates FY17E FY18E Introduction ( Crore) Old New % Change Old New % change FY19E Comments Sales 6, , , , ,694.7 Revising sales downwards considering the adverse impact of demonetisation on the company. EBITDA 1, , , , ,396.6 EBITDA getting revised downwards on account of Increasing input cost and advertisment expense EBITDA Margin (%) bps bps 18.1 PAT , ,22.8 Lower EBITDA leads to downwards revision in the PAT EPS ( ) Assumptions Current Earlier FY16 FY17E FY18E FY19E FY17E FY18E Std. Sales ( crore) 4, ,93.8 5,65.7 6,47.8 5,76.3 5,946.4 Subs. Sales ( crore) 1,156. 1, , , ,58.8 1,94.7 Edible Oils vol. gr (%) Edible Oils value gr (%) Hair Oils vol. gr (%) Hair Oils value gr (%) ICICI Securities Ltd Retail Equity Research Page 2

3 Quarterly highlights Significant product pipeline reduction in the wake of demonetisation led to 9.% decline in the domestic business. The volume for the domestic segment declined 4%. Rural and wholesale were the worst affected by this, mainly in northern and eastern India. The company witnessed a recovery in December post the major impact in November Dented by demonetisation, rural and urban sales declined 2% and 5%, respectively. On the contrary, the modern trade segment and the CSD & institutional sales for the company grew 8% and 4%, respectively Though volumes grew 2% for the quarter, the same was offset by the exchange rate differential resulting into flat business from the international segment (2% constant currency growth). Price cuts taken in the parachute rigid portfolio in Bangladesh on count of softening in copra prices led to a muted performance, flat sales on constant currency term. South East Asia and South Africa grew 6% and 4%, respectively. However, macro economic headwinds in the MENA region led to a decline of 11% there Parachute rigid portfolio witnessed volume decline of 1% YoY (recovered well vs. 6% decline in Q2FY17). Prices were up 12% YoY for the category amid soft copra prices. Though sequentially the prices were up 17% the company decided not to take any hikes in order to gain lost volumes Saffola segment was strong despite demonetisation on account of exposure to modern trade. It reported volume growth of 6% YoY & 7% value growth while gaining 33 bps market share in the super premium refined edible oil to 65% during Q3FY17 VAHO segment was the worst affected segment for the company due to demonetisation as it witnessed inventory correction across trade channel. Volumes declined 12% and valued de-growth was 13% for the segment. Despite this, it gained volume market share by 141 bps in the category to 33% The youth brand portfolio also declined 15% in volume terms because of the discretionary nature of products in the wake of demonetisation Copra prices for the quarter were down 5% YoY (up 17% QoQ). Additionally, other key inputs like rice bran oil was up 15%, liquid paraffin (LLP) was up 7% during the quarter. The management expects copra prices to further strengthen. In order to gain lost volumes in last quarter, the company deliberately did not take any price hike despite inching copra prices. However, company remains vigilant and would take price hikes going forward. Bangladesh, which contributes to 45% of international sales, declined was flat during the quarter. Though volumes grew 7% YoY, lower prices in the Parachute segment on account of benign raw material prices led to flat revenues. MENA region declined 11% mainly due to the unfavourable economic situation there. South East Asia grew by 6% YoY and South Africa grew by 4% YoY in constant currency term. Though the quarterly performance was impacted by demonetisation, the company remains optimistic of 8-1% volume growth driven expected recovery in consumption, continuous new product launches and their rapid scaling and expected end of deflationary cycle (by Q4FY17). Additionally, it plans to remain invested in the brand building and increase in its reach and maintain its advertisement spend in the range of 11-12% of net sales and EBITDA margin in the range of 17-18%, going forward ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Demonetisation a blip; expect revenue back on track, going forward Marico s revenue growth of 7% in FY16 was entirely led by volume growth. Volume growth for the company dipped from an average of ~14% in FY11-13 to 6% in FY15 following the significant increase in input costs that were driving up the contribution of price led growth in revenues (~2% price led growth in FY15) in an already subdued economic scenario. Marico s increasing marketing activity, reach & strong brand equity aided in a revival of Parachute s volume growth to ~7% in FY16. However, YTD FY17, the segment has witnessed marginal growth of 1% mainly on account of a) lower copra prices which led to less competitiveness in the local market and b) the untimely price hike during Q2FY17 leading to 6% volume decline. However, with copra prices inching up, we believe the company would be a beneficiary of the inflationary situation and witness both volume and value growth, going forward. In FY16, the company forayed into the hair fall control segment with the launch of Parachute Advansed Ayurvedic oil in southern states and extended it to other non-southern states (mainly North and East). Though the performance in the non-southern region is not very encouraging, the company expects the segment to cross 1 crore by FY18E ( 6 crore in FY16) led by brand building and expansion initiatives. During the quarter, demonetisation impacted the VAHO segment significantly and led to volume decline of 12% YoY. On the bright side, Saffola maintained its traction as it reported 6% growth in Q3FY17 despite the adverse environment. We estimate the segment to post 6% and 4% volume & value CARG over FY16-19E. Tapping the inflationary situation, going forward, coupled with initiatives like a) increasing reach in rural India, b) increasing innovations in food portfolio (Saffola flavoured oats segment extended to Chinese & Italian variants to cater to younger population) and c) new launches in VAHO & youth brands portfolio, we expect revenue growth at 8.6% CAGR in FY16-19E. Exhibit 1: Sales & sales growth trend FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E Sales ( crore) Sales growth (%) ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 2: Domestic business volume growth (%) Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17-4. Q3FY17 Exhibit 3: Volume growth in % (YoY) for Marico s key brands and products Q1FY14 Q2Y14 Q3FY14 Q4FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Parachute Saffola VAHO Increasing RM cost & advertisement expense to restrict EBITDA growth EBITDA margins have hovered in the range of 13-14% in FY8-13. In FY14, Marico witnessed a significant jump in margins to 15.9% following the de-merger of its loss-making Kaya business. The de-merger of Kaya has significantly lowered the employee expenses and other operating expenses resulting in up tick in margins. Marico s margins are highly susceptible to copra and coconut oil prices (key raw materials). Hence, any fluctuation in prices of these commodities impacts margins significantly. In FY14, in spite of the de-merger of Kaya business margins in H2FY14 were stressed following the ~7% increase in copra prices to ~ 15/kg and ~85% increase in coconut oil prices to ~ 145/kg. Further, the slowing demand scenario during the period limited the company from passing on the entire input cost inflation thereby straining margins. However, copra prices have bottomed out and would witness YoY increase form the next quarter. During the quarter it was down 5% YoY but up 17% sequentially. However, we do not expect any significant impact on margins as we believe Marico s focus towards improving its sales mix and premium products would offset the stress on its margins due to RM costs. On account of lower copra prices, we expect the company to enjoy higher operating margin for FY17E to 18.9%. However, going forward, with rising input cost and advertisement expense, we expect it to be 17.6% and 18.1% for FY18E and FY19E, respectively ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 4: Raw material cost (%) & EBITDA margin (%) FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E Raw Material Cost to Sales % EBITDA Margins Healthy sales growth & lower taxes to lead 12.3% PAT CAGR Due to the company s factories in India and Vietnam coming out of tax benefits, the tax rate increased from an average of 22-24% until FY13 and to 29.7% in FY16. However, going forward, with the corporate tax rate expected to witness a decline in India, we estimate PAT will grow at CAGR of 12.2% in FY16-19E to crore in FY19E. Exhibit 5: PAT ( crore) - LHS and PAT growth YoY (%) - RHS FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E PAT ( crore) PAT Growth (%) 5 Chart includes Kaya numbers from FY8-13 however FY14-FY18E does not include Kaya numbers. ICICI Securities Ltd Retail Equity Research Page 6

7 Cautious on international business growth outlook Marico s international business (22% of revenues in FY16) comprises Marico s operations in Bangladesh, Middle East and North Africa (MENA), South Africa and South East Asia. International business revenues have remained subdued since H2FY13 following the constant political disturbances in these regions, pulling down growth from 25-4% to 7% in FY16. Going ahead, though we believe that Marico s increasing focus in Bangladesh markets is encouraging but the persistent macros headwinds in Middle East and North Africa (MENA) to remain a drag on the international business in the near term. Exhibit 6: International revenue growth YoY (%) Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 ICICI Securities Ltd Retail Equity Research Page 7

8 Outlook & Valuation Marico s largely urban centric portfolio (~66% of revenues are from urban India) has impacted growth rates from H2FY13 onwards following the slowing urban consumption demand in the economy. Following this, the company is actively expanding its presence in the higher growth rural markets. Post demonetisation, the company is geared to increase direct reach and reduce wholesale dependence. In the hair oils segment, we believe near term growth in pure coconut hair oil (Parachute) revenues would be largely volume driven along with modest realisation growth on the back of premiumisation. There could, however, be traction in VAHO revenue growth led by innovations in the segment. In the health foods segment, Marico s expansion in oats and muesli would continue to witness market share gains and strong volume growth led by innovations and new launches (Saffola flavoured oats extended to Chinese & Italian variants to cater to young population). Saffola oats crossed 1 crore sales in FY16. Further, the successful integration of Paras youth brands (Set Wet, Zatak and Livon) and entry into hair colours segment would keep revenues from this portfolio also healthy. Hence, we expect Marico s revenue growth from FY16-19E to grow at a CAGR of 8.6%. Though the company is focusing on changing sales mix towards premium products, we believe that the increasing input cost and stable advertisement expense towards the existing and new product portfolio will limit the operating margin expansion. We are estimating the EBITDA margin at 17.6% and 18.1% for FY18E and FY19E, respectively. Led by healthy sales growth and lower tax rate, we estimate the PAT to grow at 12.2% CAGR over FY16-19E. We remain optimistic on company s growth outlook and continue to value the stock at a premium to its five-year average P/E at 38x FY19E EPS of 7.9 and reiterate our BUY recommendation on the stock with a target price of 33. Exhibit 7: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY17E FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 8

9 Recommendation history vs. Consensus ( ) (%) Jan-15 Apr-15 Jun-15 Sep-15 Nov-15 Feb-16 Apr-16 Jun-16 Sep-16 Nov-16. Feb-17 Source: Bloomberg, Company, ICICIdirect.com Research Price Idirect target Consensus Target Mean % Consensus with BUY Key events Date Event Jun-8 Highest copra prices ( 414/quintal, ~1% higher YTD) ; a threat to margins in a softening consumption demand scenario Jul-9 Strong revenue growth of ~25%YoY and by market share gains. Preference of defensives (FMCG Index return - ~12% YTD) further boosts stock price May-1 Declining copra intensifies competition with unbranded players. Revenue growth fell to 8-1% YoY however margins and profitability improved. Sep-1 FMCG Index return - ~4% (YTD); Copra prices started uptrending Feb-11 Acquires 85% stake in Vietnam's 'International Consumer Products' with its leading men's brand 'X-men' Jun-11 Robust revenue and volume growth of ~33% and 21%, respectively. Copra prices higher ~97% YooY resulting in market share gains in hair oils Nov-11 Copra prices peaked in May,211 ( 6865/qtl);FMCG Index return - 32% (YTD); Marico storck return - 3%; Revenue growth back on 25-3% May-12 Copra prices decline ~4% YoY; Revenue growth starts declining to 1-15% led by increasing competition from unbranded players May-13 Stock price supported by run up in FMCG Index as investors park funds in defensives. Jun-13 Earnings growth of ~34% alongwith significant improvement in margins; Revival in volume growth following price cuts Sep-13 Kaya business de-merged; volume growth remains muted after price cuts taken back; Expanding presence in rural markets Dec-13 Copra prices uptrending from September 213 onwards; FMCG Index YTD return ~8% Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Aquarius Family Trust 3-Sep Gemini Family Trust 3-Sep Taurus Family Trust 3-Sep Valentine Family Trust 3-Sep Stewart Investors 31-Dec ARISAIG Partners (Asia) Pte. Ltd. 31-Dec Mariwala (Rajvi Harsh) 3-Sep Mariwala (Rishabh Harsh) 3-Sep Mariwala (Archana H) 3-Sep Mariwala (Harsh C) 8-Dec Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Stewart Investors m 31.18m ARISAIG Partners (Asia) Pte. Ltd m -21.4m Invesco Hong Kong Limited 7.55m 1.93m Matthews International Capital Management, L.L.C m -1.55m BlackRock Institutional Trust Company, N.A. 6.98m 1.82m Kotak Mahindra (UK) Ltd -6.2m -1.46m Union Investment Luxembourg S.A. 4.84m 1.17m Robeco Institutional Asset Management B.V m -.44m First State Investments (HK) Ltd. 3.26m.88m Morgan Stanley Investment Management Inc. (US) -1.35m -.35m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Total operating Income Growth (%) Raw Material Expenses 3,77.7 2,917. 3, ,789.4 Employee Expenses Marketing Expenses Administrative Expenses.... Other expenses ,92.7 Total Operating Expenditure 4, ,92.5 5, ,313.3 EBITDA Growth (%) Depreciation Interest Other Income PBT 1,29.2 1,134. 1, ,387.8 Others.... Total Tax PAT Growth (%) Adjusted EPS ( ) Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit before Tax 1,33.8 1,134. 1, ,387.8 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity.5... Inc/(dec) in loan funds Dividend paid & dividend tax Interest Paid Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Share Capital Reserve and Surplus 1, , , ,86.8 Total Shareholders funds 2,96.8 2, , ,935.8 Long Term Borrowings Provisions & other LTL Minority Interest / Others Total Liabilities Assets Gross Block 1,32.6 1, , ,382.6 Less: Acc Depreciation Net Block Capital WIP Goodwill on Consolidation Non Current Investments Other Non CA Current Investments Inventory ,41.7 1, ,349.2 Debtors Cash Other CA Total Current Assets 2, ,23.6 2, ,831.8 Creditors Short Term Borrowings Other Current Liabilities Total Current Liabilities 1,3.1 1, , ,459. Net Current Assets ,81.8 1,372.9 Application of Funds Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) EPS (Adjusted) Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 1

11 ICICIdirect.com coverage universe (FMCG) CMP M Cap EPS ( ) P/E (x) Price/Sales (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Colgate (COLPAL) Hold 23, Dabur India (DABIND) Buy 48, GSK CH (GLACON) 5,116 6,765 Buy 24, Hindustan Unilever (HINLEV) Buy 186, ITC Limited (ITC) Buy 311, Jyothy Lab (JYOLAB) Buy 6, Marico (MARLIM) Buy 32, Nestle (NESIND) 5,994 7,658 Buy 66, Tata Global Bev (TATGLO) Hold 8, VST Industries (VSTIND) 2,55 2,792 Buy 3, ICICI Securities Ltd Retail Equity Research Page 11

12 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 12

13 ANALYST CERTIFICATION We /I, Sanjay Manyal, MBA (Finance) and Tejashwini Kumari, MBA (Finance), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH99. 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