Value added hair oils new growth driver
Q4FY13 was operationally weak… Revenues of R9.97 bn (+10% year-on-year) were 4% below expectations as the international business was impacted by issues in the GCC (restructuring + packaging transition) while domestic volume growth of +8% was modest (+5% in Parachute & Saffola each; value added hair oils was the exception with +24%). Ebitda margins at 12% were flat y-o-y versus estimates of 100bps gain. Reported PAT of R839 million (+20% y-o-y) was buoyed by exceptionals.
…but there are positives that also emerge: (i) Value added hair oils is the new growth driver (+25% in Q4 & now 16% of consolidated revenues) (ii) Unlike HUL. Marico had a strong 36% growth in modern trade. Benefits of investments on channels (MT/ chemist) and rural India are starting to emerge. (iii) Markets share trends across new products were positive?oats moved to 13-14% in year one, muesli has 9% in 2-3 quarters, skin 7% (320bps gain this season) & Paras? key brands have 7% (vs. 5% at the time of the acquisition). (iv) After a decade, dividend payout ratios have increased; however, remain far low than the mid-2000s.
Looking beyond the quarter: Volume growth outlook is likely to improve in FY14e as (i) management passes some of input costs savings to consumers and narrows its pricing premium (2-3% price correction has hit the market). (ii) Military (canteen stores) sales normalising; modest growth already seen in Q4. (iii) High focus on rural & new channels would help; (iv) normalisation of international business (benign base in Bangladesh + issues in GCC?Gulf countries?are behind us).
Restructuring update: The restructuring (India and international business being unified + Kaya demerger) is to take effect from April 1, 2013. However, the separate listing of Kaya is about 2Qs away, pending regulatory approvals. In FY13, Kaya was 8% of consolidated revenues and had (-) 4% impact on reported PAT.
Staying the course: Business fundamentals remain strong and we expect a pickup in FY14e, given better volumes, benign costs and margin expansion overseas. Retain Buy.
Investment strategy: Over the years, the stock has re-rated as its dependency on a single product (Parachute coconut oil) has declined, and the company positions itself as a branded health and wellness play. We expect the company to deliver superior earnings (est. 22% CAGR over FY13-15e, among the highest in our staples coverage) driven by healthy volumes and margins. Benefits of (i) market share gains; (ii) distribution enhancement across rural India & modern trade; (iii) portfolio expansion and product innovation; and (iv) recovery in the international business should aid growth going forward. We believe Marico?s profitability is supported by a benign input cost environment and improving global margins. The recent restructuring is a positive, providing scope for better portfolio across the domestic and international businesses. It also gives shareholders a value creation opportunity with the demerger and separate listing of Kaya.
Risks: Downside risks include: (i) Cyclical rebound in the price of copra, the key raw material; (ii) Aggressive plans to capture a larger share of the personal care opportunity in India may continue to be a drag on profitability until critical mass is reached; (iii) Marico has aggressively acquired companies and brands.