RESULT UPDATE MARICO - Myirisbreport.myiris.com/ES1/MARINDUS_20140804.pdf · Marico did not effect any price hike in July. In the ... Marico 3 Edelweiss Securities Limited ... strategy

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Marico’s Q1FY15 numbers surprised positively with higher-than-expected sales and PAT. Key positives were: (i) 6% YoY volume surge in Parachute (4% in Q1FY14) as it captured unorganised players’ pie under inflationary conditions; (ii) 10% YoY volume jump in Saffola oil (10% in Q1FY14) vs Agro Tech’s Sundrop volume dip of 11% YoY; (iii) 11% YoY volume growth in value-added hair oil; and (iv) robust 16% YoY rise in international sales (9.6% YoY constant currency) with EBITDA margin catapulting 490bps YoY. Key negative was flattish YoY sales in youth brands (high base of 40% QoQ growth in Q1FY14) and Vietnam. We expect Marico’s plan of doubling sales in four years to fructify. Maintain ‘BUY’. Robust growth across brands

Marico’s Q1FY15 numbers are a clear reflection of how sharp inflationary conditions help the market leader. Marico gained market share and delivered decent earnings growth due to operating leverage kicking in ad, employee and other costs. Saffola oats has garnered 51% share in flavoured oats market and overall No.2 position with value market share of 17%. Rural growth continued its strong trajectory (at 33% YoY) ahead of urban growth (at 25%).

Q1FY15 conference call |Key takeaways

Rural contribution to overall sales to be 35% over next two-three years (currently 30%) as Marico has increased its direct reach by 25% over FY12-14. Modern trade surged 27% YoY. Project ONE will increase direct distribution in top 6 metros, which will add value across all categories. Copra prices in Q1FY15 jumped 131% YoY which could impact near-term margin. Marico intends to maintain the volume trajectory. Youth portfolio was flattish YoY in Q1FY15 due to high base in Q1FY14 (up 40% QoQ in Q1FY14), but anticipated to revert to 15-20% YoY sales growth in two-three quarters. Marico has gained market share in gels and serum, but deo segment suffered due to intense competition. Outlook and valuations: Positive; maintain ‘BUY’

We remain enthused by Marico’s focus on new growth drivers (food, mass skin care and youth), while existing business is anticipated to grow strongly over the medium to long term. We maintain ‘BUY/ Sector Outperformer’.

RESULT UPDATE

MARICO Volumes, international business shine brightly

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Medium

Sector Relative to Market Underweight

MARKET DATA (R: MRCO.BO, B: MRCO IN)

CMP : INR 256

Target Price : INR 301

52-week range (INR) : 269 / 190

Share in issue (mn) : 644.9

M cap (INR bn/USD mn) : 165/ 2,705

Avg. Daily Vol.BSE/NSE(‘000) : 367.5

SHARE HOLDING PATTERN (%)

Current Q4FY14 Q3FY14

Promoters * 59.7 59.7 59.7

MF's, FI's & BK’s 6.2 6.0 5.7

FII's 28.1 27.6 27.6

Others 6.0 6.7 7.0 * Promoters pledged shares (% of share in issue)

: Nil

PRICE PERFORMANCE (%)

Stock Nifty

EW Consumer Goods Index

1 month 3.5 3.1 8.8

3 months 23.8 15.3 6.8

12 months 21.9 32.8 1.8

Abneesh Roy +91 22 6620 3141 [email protected] Pooja Lath +91 22 6620 3075 [email protected] Tanmay Sharma +91 22 4040 7586 [email protected]

India Equity Research| Consumer Goods

August 4, 2014

Financials (INR mn)

Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E

Net sales 16,231 12,957 25.3 10,721 51.4 46,865 55,987 65,246

EBITDA 2,666 2,215 20.4 1,543 72.8 7,480 8,734 10,309

Core PAT 1,897 1,594 19.0 916 107.2 5,041 5,889 7,197

Dil. EPS (INR) 2.9 2.4 19.4 1.4 108.7 7.6 8.8 10.7

Dil. P/E (x) 33.8 29.1 23.8

EV/EBITDA (x) 22.1 18.4 15.1

ROAE (%) 29.0 35.2 31.9

Consumer Goods

2 Edelweiss Securities Limited

Q1FY15 conference call | Key takeaways

Overall business: Management estimates 7-8% YoY volume growth and 14-15% operating margin in FY15. It expects growth to pick up in H2FY15 riding improvement in urban consumption. India business: Marico’s India business clocked strong overall volume growth of 6.5% YoY. Parachute: Parachute Coconut Oil (rigid packs) volume grew 6% YoY in Q1FY15 (4% YoY in Q1FY14; 10% YoY in Q4FY14); value growth was 41% YoY. Marico did not effect any price hike in July. In the medium term, the company expects volume growth to be in the 6-8% YoY range. Pricing action will depend on copra prices and Marico intends to maintain the volume trajectory, though it may have to compromise on near-term margin. Saffola: Saffola volume surged 10% YoY in Q1FY15 (10% YoY in Q1FY14; 11% YoY in Q4FY14). Overall value growth came in at 14% YoY. Management expects no significant improvement in margin in FY15. Value-added hair oil: Marico’s value-added hair oil portfolio volume grew 11% YoY and value growth came in at 28% YoY in Q1FY15. Growth has been across brands and not from a single brand, thus increasing net contribution to the overall portfolio. Management expects to maintain double digit volume growth in this segment. Youth business: Youth portfolio growth was flattish YoY in Q1FY15 due to high base in Q1FY14 (up 40% QoQ in Q1FY14). Marico has gained market share in gel and serum categories. However, due to intense competition in the deodorant segment, the company’s performance in this category failed to match expectations. Management expects to revert to 15-20% YoY sales growth in this category over the following two-three quarters. International business: International business margin catapulted 490bps YoY to 18.2%. However, this margin is not sustainable as management will invest in the business and maintain margin at 14-15%. Management believes that international business will deliver 15% YoY sales growth in the future riding cross pollination. Bangladesh sales surged 14% YoY in constant currency; MENA achieved constant currency growth of 18% YoY. South Africa business reported constant currency growth of 9% in Q1FY15. In Bangladesh, management believes growth will come via cross pollination (plug adapt play model). Parachute has reached saturation point and next stage of growth is expected to be triggered by focus on new categories—value-added hair oil, male grooming and colours segments. Marico is likely to grow 2x Bangladesh’s real GDP (expected to increase by 5-6% YoY). Hence, management expects to clock 8-10% volume growth in the country. In Vietnam, Marico maintained market share in the shampoo segment. Though growth was flattish in Q1FY15, it is expected to revive in H2FY15. Price increase: Management is focusing on ensuring volume growth. Unless the environment (significant raw material inflation) is highly unfavourable, no price hike will be taken.

Marico


Gross margin: Gross margin will be under pressure over the next two quarters due to high copra prices (up 131% YoY, 22% QoQ) in Q1FY15 (inventory bought in Q1FY15 will be consumed in next one-two quarters). Hence, impact of copra inflation will reflect in Q2FY15. Copra prices: Copra prices jumped 131% YoY in Q1FY15 due to shortfall in copra from Tamil Nadu. Any correction in prices in the near term looks unlikely. Project one: Project one will increase direct distribution in top 6 metros which will add value across all categories. Rural contribution: Rural contribution to overall sales will be 35% over the next two-three years (currently 30%) as Marico increased direct reach by 25% to 50,000 villages over FY12-14. Modern trade: Grew by 27% YoY. Employee cost: Employee cost in Q1FY15 was INR854mn, up 17.1% YoY, due to incremental provision towards incentives and stock appreciation rights. Depreciation: Depreciation in Q1FY15 was INR204mn. Management expects depreciation to be INR170-180mn in the balance quarters of FY15E.

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 continues to meet the competitive intensity in this category via innovations and product mix.

Consumer Goods


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. 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.

Marico


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. 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. Marico: Medium term game plan | Key Highlights

• Marico wants to be No.1 or 2 player in emerging markets of Asia and Africa and expects to double its top line over the next four-five years.

• Marico wants to be market leader in hair & skin nourishment and male grooming segments in emerging markets of Asia and Africa.

• The company is market leader in foods and wellness category in India and Vietnam and ethnic hair care in South Africa.

• There is low penetration in the chosen categories without market share concentration with multiple MNCs and high proportion of unorganised retail. Marico wants to leverage this opportunity to be a market leader.

• To achieve the above stated objective, Marico will do cross pollination, maintain talent value proposition, strong governance and framework and drive synergies among geographies.

• Marico has highlighted five key transformation areas—innovation, talent value proposition, go to market, IT & analytics and cost management.

Our View: To double the top line in next four-five years, Marico needs to post sales CAGR of 19% every year. Marico’s performance from FY10 till FY14 was 15.2% CAGR. So to achieve the objective, the company needs to achieve extra 4-5% growth every year. In our view, it is achievable, but will also depend on new growth drivers like youth, skin and foods, apart from acquisitions.

Consumer Goods


Peer Comparison GCPL: Hair colour performance

• The segment logged 14% YoY sales growth.

• GCPL continues to premiumise and launched two new Godrej Expert Rich Crème hair colour shades priced at 15% premium to the base product (INR35).

• The company continues to gain market share in the category. Dabur: Hair care performance

• Dabur’s hair oil grew by 7.1% YoY

• The overall hair care oil market is witnessing volume decline in the 3-5% range

• Hair care portfolio grew 8.4% YoY in Q1FY15 with shampoo portfolio registering 15.3% YoY surge.

Bajaj Corp: Performance

• Bajaj Corp clocked 12.4% YoY sales growth with 1.5% YoY volume declined (ex-Nomarks) affected by slowdown in the hair oil space.

• Bajaj Almonds hair oil volume declined 1% in Q1FY15 (8% volume decline in Q4FY14).

• Continued subdued performance of Kailash Parbat cooling oil (despite extended summer) with ~30% YoY sales dip.

Marico FY14 annual report | Key takeaways Theme of annual report

• Growth is through partnership and a shared understanding of resources and needs.

• Marico believes it is time to grow beyond the established homeland and to grow into new territories.

• The company will focus efforts in Asia and Africa towards creating a new wave of recognition, awareness and penetration.

• Marico will drive synergies across all geographies. Financials • Total consolidated sales grew 10% YoY due to overall underlying volume growth of 6%

YoY.

• Consolidated profit after tax (excluding exceptional items) grew 19% YoY.

• India business grew 8%.

• International business surged 16% with a structural shift in the operating margin from 10-11% a few years ago.

• During FY14, Marico received 900% dividend from Marico Bangladesh on which income tax charge of INR345mn was accounted in the books. This has increased the effective

tax rate (ETR) for the year. Profit growth, excluding this tax impact, is 26% for FY14.

Marico


Domestic business Coconut oil

• Branded coconut oil market size is INR28bn.

• In volume terms, of the total coconut oil market, about 60-65% is in branded and the balance is loose.

• Parachute’s rigid portfolio (packs in blue bottles), recorded volume growth of about 4% for FY14 over FY13.

• Parachute along with Nihar marginally improved its market share over the same period last year to 56%.

• Parachute’s share in rural markets, in the 35-40% range, is lower than that in urban markets.

Saffola

• Saffola refined edible oils franchise grew 9% YoY in volume terms during FY14.

• Marico has revamped its top-end variant i.e., New Saffola, with an improved and top-of–the-line offering for modern day needs, Saffola Total.

• Saffola maintained its leadership in the super premium refined edible oils segment with a market share of ~55% during FY14 (MAT 12 months ended March 2013: 57%).

• Saffola savory oats are now available in six flavours. Saffola has a market share of over 14% by volume in the oats category and has emerged as the No. 2 player in the category.

• Saffola Oats crossed the INR500-mn landmark (USD8.3mn) in top line during FY14.

Value-added hair oil

• Marico’s hair oil brands (Parachute Advansed, Nihar Naturals and Hair & Care) grew 11% YoY in volume terms during FY14.

• The company continues to gain market share in value-added hair oils and has emerged as a clear market leader with 28% share (for 12 months ended March 2014) in the INR45bn (USD834mn) market against 26% during the same period last year.

• Nihar Shanti Amla continues to gain market share and achieved volume market share of about 30% for FY14 in the Amla hair oils category (FY13: 25%).

• Nihar Shanti Amla is now a INR2.5bn (USD 41.7mn) brand.

Skin care

• Marico launched a multi-dimensional spray on body lotion under Parachute Advansed Body Lotion. The variant has been launched in a 100ml SKU with an introductory price of INR99.

• Skin care is estimated to be a INR50bn market, of which the body lotion segment is around INR5.5bn (USD92mn) with penetration levels below 20%.

• Parachute Advanced Body Lotion has maintained its No. 3 position with a market share of 6%.

Consumer Goods


Youth portfolio

• Youth brands grew 16% YoY during FY14.

• Marico is the leader in the hair gels and post wash leave-on conditioner (2/3rd of the youth portfolio) market with about 33% and 82% shares, respectively.

• Set Wet and Zatak deodorants (a third of the Youth portfolio) increased market share marginally to 5% in FY14.

• Set Wet (deodorants and gels) is now a INR1,000mn brand.

Newly entered categories

• Marico entered the Hair Colour category by introducing Livon Conditioning Cream Colour priced at INR39.

• The product was introduced in January 2014 and is available in three colours with two SKUs.

• The total hair colour category has low penetration and is estimated to be around INR25bn (USD400mn), of which creams (growing at ~20%) form about 25%.

• Marico has entered into partnership with Union Swiss and has introduced Bio-Oil in India during FY14.

• Marico will be marketing and distributing Bio-Oil in India on an exclusive basis.

• Bio-Oil is the No.1 selling product to improve appearance of scars and stretch marks.

• Bio-Oil is positioned as a premium skin care product priced at INR450 for 60 ml.

• Scar and stretch mark category is estimated to be around INR6,500mn (USD105mn).

• Having Bio-Oil in the portfolio will further strengthen Marico’s presence in channels such as chemists and modern trade.

International business • Marico’s international FMCG business (its key geographies being Bangladesh, Middle

East, Egypt, South Africa, South East Asia) comprised ~25% of the Marico Group’s turnover in FY14.

• The overall growth in Marico International was 16%. The underlying volume growth for FY14 was 5% YoY.

Bangladesh

• FY14 was a challenging year for Bangladesh. Post the general elections, political situation and economic sentiments have started to ease.

• Marico grew by 4% on constant currency basis.

• The company’s value-added hair oils portfolio maintained its market share at 18.5% on MAT basis.

• Marico holds No.3 position in VAHO category on MAT basis. However, on the basis of exit market share, the company is now No.2 in the category with 20% share.

• Marico’s HairCode brand continues to lead the powdered hair dye market with a market share of around 36%.

Marico


Middle East and North Africa (MENA) • Dubai’s economic outlook remains bullish over the coming years as a whole host of

sectors possess significant growth prospects.

• Higher inflation levels and deteriorating foreign currency reserves along with the unstable political situation poses a threat to economic growth of Egypt.

• The penetration of hair grooming and skin care products in Egypt is modest.

• Egypt also offers a gateway to North African countries such as Algeria, Libya and Morocco.

• MENA business on an overall basis grew by 4% (constant currency basis) during FY14.

• Egypt grew by 21% YoY led by volume growth in HairCode and Fiancée.

• GCC business reported top line decline of 20% YoY for FY14. However, the region has started showing signs of revival and reported top line growth in Q4FY14.

• In Egypt, HairCode and Fiancée together improved market share to 52% in the gels

category and reported double digit volume growth. Vietnam

• Vietnam has a young population that provides opportunity for FMCG companies to grow rapidly.

• South East Asia registered a growth of 11% YoY in FY14.

• X-Men maintained its leadership in male shampoos and the No. 2 position in male deodorants.

• The company continues to scale up its presence in neighboring countries like Malaysia, Myanmar and Cambodia.

South Africa

• In the near term, the South African economy is expected to remain below potential on higher inflation and interest rates, depreciating currency and subdued domestic demand.

• South Africa offers a unique opportunity in ethnic hair care and grooming. The country also forms a gateway to the rest of sub-Saharan Africa.

• The business reported top line growth of 5% for FY14.

Consumer Goods


Outlook • Marico expects international margin to stabilise in the 13-14% range and expects a top

line growth of 15-20% in constant currency terms.

• The company expects youth portfolio growth rate to be ~20-25%. However, in the immediate term, the growth rate is more likely to be around 15-20%.

• In the Indian business, the company expects volume growth of 7-8% in the near term. This is expected to improve going forward from early/mid FY15.

• Marico has chosen not to pass on the entire input cost push to continue the process of conversion from loose oil.

• However, over the medium term, margin of about 17-18% (without corporate overheads) is sustainable in the domestic business.

• A&P as % to sales is expected to be around 11-12%.

Key developments • Marico has roped in actor Rahul Bose as its new brand ambassador for Livon Hair Gain.

Earlier, this brand was not advertised through a celebrity.

• The company launched a new spray in body lotion under the brand, Parachute Advanced. The product is a body lotion that can be sprayed on the body and it gets absorbed into the skin. The product is priced at INR120 for a 100ml pack; introductory offer is INR99.

• Marico has decided to use e-commerce sites to ‘pre-launched’ new products. Niche brands like Livon Hair Gain and Bio Oil will use this channel to reach out to far flung markets such as the North-East, where the company may not have a robust distribution network.

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. We believe the revival in its core category (hair oil and edible oil) and international business, is sustainable. We like Marico’s focus on increasing both rural (enhanced rural reach by 25% to 50,000 villages over FY12-14) and urban distribution (initiated Project ONE to increase distribution in top 6 metros). We expect strong performance to continue. With recovery in urban growth on the cards coupled with these factors, we increase our target multiple to 28x FY16 EPS to arrive at a target price of INR301. We maintain ‘BUY’ and rate it ‘Sector Outperformer’ on relative return basis.

Marico


Chart 1: 1 year forward PE band

Source: Edelweiss research

Table 1: Summary of growth

Source: Company, Edelweiss research

Table 2: Marico's market share (volume) position


* Value market shares

0

60

120

180

240

300

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

(INR)

5x

10x

15x

20x

25x

30x

Category / BusinessReported growth in

Q1FY15 (%)

Share of Group’s Turnover basis FY14

resultsGroup: total reported value growth 25.0 FMCG business (India) 28.0 75.0 Parachute coconut oil in rigid packs 41.0 23.0 Value added hair oil 28.0 18.0 Saffola (refined edible oil) 14.0 15.0 International business group: total 16.0 25.0

Brands Category

Indicative market share

range % RankParachute and Nihar Coconut Oils (India) 56.0 1Parachute Advansed, Nihar, Hair & Care

Hair Oils (India) 28.0 1

Saffola Super Premium refined Edible Oils

55.0 1

Set Wet and Zatak Deodorants (India) 5.0 6Livon and Silk & Shine Post wash Leave– On 82.0 1Set Wet and Parachute after shower*

Hair Creams/Gels 42.0 1

Parchute (Bangladesh) Coconut Oil (Bangladesh) 84.0 1X-Men* Men's shampoo (Vietnam) 38.0 1Hair Code & Fiancee* Hair care (Egypt) 60.0 1

Consumer Goods


Table 3: Volume growth in sales of key business (%)

Table 4: Standalone business performance

Table 5: International FMCG business

Table 6: International business


Key business Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15CPB (India) 20.0 17.0 14.0 14.0 9.0 8.0 10.0 4.0 3.0 6.0 6.5 Parachute coconut oil in rigid packs 13.0 11.0 18.0 9.0 6.0 5.0 4.0 1.0 2.0 10.0 6.0 Value added hair oil 20.0 18.0 25.0 20.0 30.0 25.0 16.0 15.0 8.0 5.0 11.0 Saffola 15.0 3.0 12.0 6.0 4.0 5.0 10.0 7.0 9.0 14.0 10.0 International 39.0 37.0 17.0 16.0 - (1.0) 9.0 4.0 3.0 8.0 9.6

(INR mn) Q1FY15 Q1FY14 % YoY change Q4FY14 % QoQ changeNet Sales 13,487 10,554 27.8 8,503 58.6 Other Op. Income 36 16 118.4 19 87.0 Total 13,522 10,570 27.9 8,522 58.7 COGS 8,046 5,677 41.7 4,740 69.7 Employee cost 526 444 18.6 346 52.2 Advt. and promotion 1,384 1,206 14.8 947 46.1 Other Expenditure 1,535 1,384 10.9 1,337 14.8 Total expenses 11,491 8,711 31.9 7,370 55.9 EBITDA 2,031 1,859 9.3 1,152 76.3 Depreciation 114 102 12.2 127 (9.9) EBIT 1,917 1,757 9.1 1,025 87.0 Other inc 103 94 9.7 1,174 (91.3) Interest net 61 92 (33.3) 56 8.9 Exceptional Items - - NM - NMPBT 1,959 1,759 11.3 2,143 (8.6) Tax 515 379 NM 372 38.5 PAT 1,444 1,381 4.6 1,771 (18.5)

EPS 2.24 2.14 4.7 2.75 (18.5)

As % of net salesCOGS 59.5 53.7 579 55.6 388 Employee 11.1 12.3 (124) 6.8 429 Advt.and promotion 16.2 16.5 (22) 10.2 606 Other expenditure 18.0 18.9 (89) 14.4 364 EBITDA 23.8 25.4 (155) 12.4 1,145 PAT 16.9 18.9 (191) 19.0 (210) Tax Rate 6.0 5.2 87 4.0 204

Factor Q1FY15 YoY growth %Reported Growth 16.3 Volume/Value growth 9.6 Exchange Rate impact 6.7 Turnover (INR mn) 3,430

Region Reported growth % YoYBangladesh 14.0 Middle East and North Africa 18.0 South Africa 9.0 South East Asia -

Marico


Financial snapshot (INR mn) Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E Net revenues 16,231 12,957 25.3 10,721 51.4 46,865 55,987 65,246 Cost of goods sold 8,911 6,612 34.8 5,597 59.2 23,992 28,833 33,275 Gross profit 7,320 6,345 15.4 5,123 42.9 22,874 27,154 31,970 Staff costs 854 730 17.1 651 31.2 2,847 3,415 4,045 Advt. sales & promotions 1,922 1,700 13.0 1,219 57.6 5,612 6,606 7,764 Other expenses 1,878 1,700 10.4 1,710 9.8 6,935 8,398 9,852 EBITDA 2,666 2,215 20.4 1,543 72.8 7,480 8,734 10,309 Depreciation & amortization 204 160 27.3 215 (5.4) 769 801 861 EBIT 2,463 2,055 19.8 1,327 85.6 6,711 7,933 9,448 Other income 183 139 31.4 128 42.7 579 574 850 Interest 70 100 (29.6) 68 4.3 345 327 302 Profit before tax 2,576 2,094 23.0 1,388 85.5 6,946 8,179 9,995 Tax 678 500 35.7 473 43.6 1,905 2,290 2,799 Core profit 1,897 1,594 19.0 916 107.2 5,041 5,889 7,197 Extraordinary items Minority interest (44) (44) NA (28) NA (187) (218) (266) Net profit 1,853 1,550 19.5 888 108.7 4,854 5,671 6,930 Diluted EPS (INR) 2.9 2.4 19.4 1.4 108.7 7.6 8.8 10.7 As % of net revenues COGS 54.9 51.0 52.2 51.2 51.5 51.0 Employee cost 5.3 5.6 6.1 6.1 6.1 6.2 Adv. & sales promotions 11.8 13.1 11.4 12.0 11.8 11.9 Other expenditure 11.6 13.1 16.0 14.8 15.0 15.1 EBITDA 16.4 17.1 14.4 16.0 15.6 15.8 EBIT 15.2 15.9 12.4 14.3 14.2 14.5 EBIT incl. other income 16.3 16.9 13.6 15.6 15.2 15.8 PBT 15.9 16.2 12.9 14.8 14.6 15.3 Adjusted net profit 11.4 12.0 8.3 10.4 10.1 10.6 Tax rate 26.3 23.9 34.0 27.4 28.0 28.0

Consumer Goods


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 established strong ground in its core categories (hair oil and edible oil) with dominant market shares. It has been able to distinguish itself by offering niche products through brands such as Saffola (flavoured oats), Livon while extending Parachute to various new generation hair care products such as hair creams and value-added hair oils. Improvement in sales and margins of international businesses are to aid consolidated performance.

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 quarters. A greater-than-expected inflation can hurt the margins substantially. Appreciation of rupee against Egyptian pound, Bangladeshi taka and other international currencies puts the growth in revenues and profits at risk.


Marico

Financial Statements

Income statement (INR mn)

Year to March FY13 FY14 FY15E FY16E

Net revenue 45,962 46,865 55,987 65,246

Materials costs 22,099 23,992 28,833 33,275

Gross profit 23,863 22,874 27,154 31,970

Employee costs 3,806 2,847 3,415 4,045

Other Expenses 7,820 6,935 8,398 9,852

Advertisement & sales costs 5,979 5,612 6,606 7,764

EBITDA 6,258 7,480 8,734 10,309

Depreciation & Amortization 866 769 801 861

EBIT 5,392 6,711 7,933 9,448

Other income 375 579 574 850

EBIT incl. other income 5,767 7,290 8,507 10,298

Interest expenses 580 345 327 302

Profit before tax 5,187 6,946 8,179 9,995

Provision for tax 1,462 1,905 2,290 2,799

Net profit 3,725 5,041 5,889 7,197

Extraordinary income/ (loss) 332 - - -

Minority interest (98) (187) (218) (266)

Profit after minority interest 3,959 4,854 5,671 6,930

Shares outstanding (mn) 641 641 645 645

Diluted EPS (INR) 5.7 7.6 8.8 10.7

Dividend per share (INR) 0.5 4.0 0.9 1.1

Dividend payout (%) 8.1 53.1 10.0 10.0

Common size metrics


Materials costs 48.1 51.2 51.5 51.0

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 15.6 15.8

Net profit margins 7.9 10.4 10.1 10.6

Growth ratios (%)


Revenues 14.7 2.0 19.5 16.5

EBITDA 22.0 19.5 16.8 18.0

Net profit 14.5 22.6 16.8 22.2

EPS 0.1 33.8 16.2 22.2

Key Assumptions


Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0

Repo rate (exit rate) 7.5 8.0 7.8 7.3

USD/INR (Avg) 54.5 60.5 58.0 56.0

Company

Revenue growth (Y-o-Y %)

International business growth 13.5 16.8 15.0 15.0

Hair oil sales growth 31.3 19.1 30.0 14.0

Edible oil sales growth 5.7 3.8 15.0 15.0

EBITDA margin assumptions

Oil Seeds (Copra and kardi seeds) as % of COGS 30.0 23.3 34.0 34.0

Raw Oil (Other than copra and kardi seeds) as % 23.0 26.4 22.0 22.0

COGS as % of sales (Consol) 48.1 51.2 51.5 51.0

Staff costs as % of sales (Consol) 8.3 6.1 6.1 6.2

Financial assumptions

Tax rate (%) 28.2 27.4 28.0 28.0

Capex (INR mn) 8,361 (7,374) 766 770

Debtor days 16 16 16 16

Inventory days 131 126 126 126

Payable days 69 75 75 75

Cash conversion cycle (days) 78 68 67 67

Interest rate on o/standing debt (%) 7.0 4.4 5.0 5.0

Dividend as % of net profit 8.1 53.1 10.0 10.0


Consumer Goods

Peer comparison valuation

Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)

Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E

Marico 2,705 29.1 23.8 18.4 15.1 35.2 31.9

Bajaj Corp 555 21.9 19.7 15.1 13.0 28.4 28.7

Colgate 3,464 38.2 32.8 26.4 22.6 87.3 91.1

Dabur 5,881 34.2 28.6 25.8 21.3 35.0 33.5

Emami 1,980 27.7 23.9 24.1 20.4 40.0 36.9

Godrej Consumer 4,741 33.3 26.5 23.2 19.1 21.4 23.2

Hindustan Unilever 24,819 36.7 33.0 26.6 23.9 106.2 99.3

Nestle Ltd 8,236 39.4 33.6 22.7 19.4 47.3 44.0

AVERAGE - 32.0 27.3 22.3 18.9 48.5 47.2

Source: Edelweiss research

Cash flow metrics


Operating cash flow 4,319 6,605 5,703 7,333

Investing cash flow (8,299) (1,768) (766) (770)

Financing cash flow 4,423 (3,393) (1,487) (1,521)

Net cash flow 442 1,444 3,451 5,043

Capex (8,361) 7,374 (766) (770)

Dividends paid (375) (2,673) (659) (718)

Profitability & efficiency ratios


ROAE (%) 23.2 29.0 35.2 31.9

ROACE (%) 24.6 29.7 39.4 37.1

Inventory day 131 126 126 126

Debtors days 16 16 16 16

Payable days 69 75 75 75

Cash conversion cycle (days) 78 68 67 67

Current ratio 2.3 2.3 2.7 3.1

Debt/EBITDA 1.4 0.9 0.7 0.6

Debt/Equity 0.4 0.5 0.3 0.2

Interest coverage 9.3 19.5 24.2 31.2

Operating ratios


Total asset turnover 1.9 1.9 2.4 2.3

Fixed asset turnover 5.3 4.9 8.9 10.5

Equity turnover 2.9 2.8 3.5 3.0

Valuation parameters


Diluted EPS (INR) 5.7 7.6 8.8 10.7

Y-o-Y growth (%) 0.1 33.8 16.2 22.2

CEPS (INR) 7.1 9.0 10.4 12.5

Diluted PE (x) 45.2 33.8 29.1 23.8

Price/BV (x) 5.7 7.9 6.4 5.2

EV/Sales (x) 3.7 3.5 2.9 2.4

EV/EBITDA (x) 27.2 22.1 18.4 15.1

Dividend yield (%) 0.2 1.6 0.3 0.4

Balance sheet (INR mn)

As on 31st March FY13 FY14 FY15E FY16E

Equity capital 645 645 645 645

Reserves & surplus 19,170 12,961 17,974 24,186

Shareholders funds 19,815 13,606 18,618 24,831

Minority interest (BS) 351 358 576 842

Borrowings 8,719 6,798 6,298 5,798

Deferred tax liability 58 96 96 96

Sources of funds 28,943 20,858 25,588 31,567

Total net fixed assets 14,224 6,378 6,343 6,252

Goodwill on consolidation 3,955 2,543 2,543 2,543

Non current investments 380 499 499 499

Current Investments 1,136 2,607 2,607 2,607

Cash and equivalents 2,668 4,064 7,515 12,557

Inventories 8,627 7,962 9,953 11,487

Sundry debtors 1,966 2,232 2,454 2,860

Loans and advances 2,555 1,474 1,474 1,474

Other current assets 1,562 1,892 1,892 1,892

Total current assets (ex cash) 14,709 13,560 15,774 17,713

Trade payable 4,785 5,025 5,925 6,837

Others current liabilities 3,345 3,766 3,766 3,766

Total current liabilities & 8,129 8,791 9,691 10,603

Net current assets (ex cash) 6,580 4,769 6,083 7,109

Uses of funds 28,943 20,858 25,588 31,567

Book value per share (INR) 44.9 32.3 39.7 49.0

Free cash flow (INR mn)


Net profit 3,959 4,854 5,671 6,930

Others 446 104 545 569

Gross cash flow 5,271 5,727 7,017 8,360

Less: Changes in WC 952 (878) 1,314 1,027

Operating cash flow 4,319 6,605 5,703 7,333

Less: Capex 8,361 (7,374) 766 770

Free cash flow (4,042) 13,979 4,937 6,563


Marico

Holding – Top10 Perc. Holding Perc. Holding

Arisaig Partners Asia Pte Ltd 5.5 Oppenheimerfunds Incorporated 4.4

First State Investments Icvc 4.1 Indivest Pte Ltd 3.4

Arctic Investments Pty Ltd 1.4 Franklin Templeton Investments - India 1.3

Franklin Templeton Investments - Multiple Portfolio 1.3 Baring India Investments 1.1

Life Insurance Corp Of India 1.1 Napean Trdg Inves Co Pvt 1.1

*as per last available data

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 1092211.0004 Dec 2013 Harsh Mariwala Buy 200000.0004 Dec 2013 Harsh C. Mariwala Buy 200000.0004 Dec 2013 Kishore Mariwala Sell 200000.00

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available

*in last one year

Additional Data

Directors Data Harsh Mariwala Chairman Nikhil Khattau Chairman of Audit Committee, Non-Executive and Independent DirectorRajeev 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 Saugata Gupta MD & CEO

Auditors - Price Waterhouse; Internal Auditors: Ernst & Young


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Asian Paints BUY SO M Bajaj Corp HOLD SU H

Colgate HOLD SP M Dabur BUY SO M

Emami BUY SP H GlaxoSmithKline Consumer

Healthcare

HOLD SP M

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 SO M

United Spirits BUY SP H

RATING & INTERPRETATION

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


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 [email protected] +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

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 151 44 9 205* 1 stocks under review

Market Cap (INR) 144 56 5

Date Company Title Price (INR) Recos

Recent Research

04-Aug-14 Bajaj Corp Volumes lukewarm, but recovery anticipated; Result Update

229 Hold

31-Jul-14 Pidilite Industries

Volumes robust; margin to script recovery story; Result Update

360 Buy

30-Jul-14 Godrej Consumer Products

International shines, but taking a breather on home turf; Result Update

843 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to


Consumer Goods

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Marico

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RESULT UPDATE MARICO - Myirisbreport.myiris.com/ES1/MARINDUS_20140804.pdf · Marico did not effect any price hike in July. In the ... Marico 3 Edelweiss Securities Limited ... strategy