Marico Recommendation: Buy Price target: Rs 125

Current market price: Rs67

Result highlights

Marico's Q4FY2009 results were much ahead of our expectation primarily due to a sharper-than-expected decline in the raw material cost and a lower-than-expected advertisement and promotional expenditure.
The net sales grew by a robust 20.5% year on year (yoy) to Rs561.2 crore in Q4FY2009, which is in line with our estimate of Rs562.9 crore for the quarter. We believe a strong growth in the top line is attributable to a steady volume growth (mainly in Parachute and hair oil portfolio) and price hikes implemented by the company across product portfolio over the last 12 months.
The operating profit margin (OPM) improved by 328 basis points yoy to 13.1% in Q4FY2009, driven by a sharp decline of 19.4% yoy in the advertisement and sales promotion expenditure. However, the same was ahead of our expectation of 10.8% for the quarter, mainly on account of a lower-than-expected raw material cost and a lower advertisement and promotional expenditure for the quarter. Thus, the operating profit grew by 60.9% yoy to Rs73.3 crore during the quarter (as against our expectation of Rs60.6 crore).
A higher-than-expected other income and almost no tax led to a strong 83.8% year-on-year (y-o-y) increase in the adjusted net profit to Rs59.4 crore in Q4FY2009 (as against our expectation of Rs35.5 crore for the quarter).
The company has booked an impairment loss of Rs15.03 crore, as it is exiting Sundari Spa business, which led the reported net profit increase by a meagre 8.7% yoy to Rs44.4 crore in Q4FY2009.
As anticipated, Saffola registered a subdued volume growth of 5% yoy (slightly better than the 3% y-o-y volume growth in Q3FY2009) on account of its high premium over other edible oil brands available in the domestic market. In anticipation of lower safflower oil prices in FY2010, Marico has implemented price reductions in Saffola at the beginning of April 2009, which will lower the premium Saffola enjoys over other brands in the market. We believe, this will help the brand to register a better volume growth in coming quarters.
For larger fast moving consumer goods (FMCG) companies such as Hindustan Unilever Ltd (HUL) and ITC, volume growth is a key concern. However, Marico's volumes are on a strong pedestal and with an anticipated better volume growth in Marico's flagship brands such Parachute and Saffola, we expect the company to post a near double-digit volume growth in FY2010.
We have revised upwards our earnings estimate for FY2010 by 7.7% mainly on account of a higher-than-expected decline in the raw material cost. We have also introduced our FY2011 earnings estimate through this note.
We expect Marico to gain significantly from the decline in the key raw material prices such as copra and kardi oil (safflower oil) prices in FY2010. Thus, we expect Marico's bottom line to grow at a compounded annual growth rate (CAGR) of 15.3% over the period FY2009-11. As Inflationary pressures are over in domestic as well as international markets, we expect Marico's product portfolio to deliver a better volume growth going forward. At the current market price, the stock trades at 17.0x its FY2010E earnings of Rs4.0 and 15.1x its FY2011E earnings of Rs4.4. We maintain our Buy recommendation on the stock with a revised price target of Rs80 (20x FY2010E earnings, which is at 20% discount to our one-year forward target multiple of 25x for HUL).

http://ways2trade.blogspot.com
Free SMS Calls on India Stock Market
DisasterAwareness | Health | Commodities

Earn decent money by receiving SMSes on your cell phone.  Free Signup!