Marico’s Q4FY11 sales were in line, whereas gross margin pressure pulled down Ebitda (earnings before interest, taxes, depreciation and amortisation) despite cuts in adspend. Many line items are not comparable as the reported results had eight exceptional items. Overall organic volume growth was a tad disappointing at 5%.
Deceleration in volume growth in coconut oil (CNO) to about 3% is in line with our expectations due to the impact of a 32% price increase. CNO volumes could recover by Q2FY12 due to recent price increases in value added oil, in our view.
Overall volume growth was a bit disappointing at 10%, of which 5% was organic and 5% inorganic growth. Deceleration in volume growth in coconut oil due to the price increase (32%) in FY2011 was clearly visible. Saffola grew by 14% in volume terms. The company has hiked prices by 12% to pass on the impact of input cost inflation in rice bran and safflower oil. The hair oil business grew by 21% and our channel checks suggest Shanti Badam Amla has gained shares from Dabur Amla due to differential pricing.
International business grew by 13% in volume terms. Political and economic disruption in MENA (Mideast and N Africa) region impacted sales by R200 million. During the quarter, the company acquired a Vietnam-based company, International Consumer Products Corporation (ICP), which is present in personal care, beauty cosmetics, sauces and condiments. Key brands are X-Men and L?Ovite.
Consolidated Ebitda margins declined 380 bps (basis points) to 10.5% for the quarter (910 bps decline in gross margins and 120 bps higher staff costs mitigated to an extent by 580 bps cut in adspend and 60 bps lower SG&A–selling, general and administrative expenses.)
There are three developments that could affect the earnings in FY12. First being a possible recovery in Parachute volume growth. Marico?s value-added hair oil could still outperform CNO in volume terms in FY12 due to successful launches of cooling oil in Andhra and Tamil Nadu and increasing consumer acceptance of Parachute anti-hairfall oil in south India apart from potentially continuing gains in Shanti Badam Amla due to aggressive pricing.
H1FY11 margins could be under pressure as YoY inflation in copra prices are still >40%. The price increases (32%) could help Marico recover absolute margins in near term, but the real risk is greater inflation in copra.
We maintain our Add rating and raise our target price to R160. We believe that most of the worries regarding input cost inflation are already priced in.
We like the unique ability demonstrated by Marico in (i) building a strong domestic portfolio with good franchise value, (ii) meaningfully differentiated offerings in the portfolio, (iii) good pricing power, (iv) presence in niche segments, (v) growth opportunity in foreign markets and (vi) successful inorganic growth track record.