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1、,Neutral,Company report,Consumer&RetailPersonal ProductsEquity India,abcGlobal Research,Marico Industries(MRCO IN)Initiate at N:On the right track,but challenges persist Solid core domestic businesses(edible oils and hair oils),butinput costs are volatile and not always possible to pass on,Target pr
2、ice(INR),235.00,Share price(INR)Potential return(%),220.056.8,Maricos focus on wellness and beauty care is prudent,butacquisition-led growth(Paras)comes at a cost,Note:Potential return equals the percentage,difference between the current share price andthe target price,International business has yet
3、 to evolve while valuation has,MarHSBC EPSHSBC PE,2012 a 2013 e5.18 6.4442.5 34.2,2014 e8.0127.5,priced in significant growth expectations.Initiate at Neutralwith a DCF-based TP of INR235,Performance,1M,3M,12M,Absolute(%)Relative(%),7.03.8,6.8-3.0,48.828.9,Impressive track record of core portfolio,b
4、ut significant commodity linkage.Marico has,recorded 40%annualised returns to investors over the past 10 years,spread fairly evenlyacross this period.This is on the back of revenue and earnings CAGRs of 19%and c20%,respectively,via organic and inorganic routes.The companys core businesses edible oil
5、s,11 December 2012Amit Sachdeva*AnalystHSBC Securities and Capital Markets(India)Private Limited+9122 2268 1240amit1sachdevahsbc.co.inErwan Rambourg*Head of Consumer Brands and RetailEquity Research,Asia PacificThe Hongkong and Shanghai BankingCorporation Limited+852 2996.hkKuldeep Gangwar*,CFAAssoc
6、iateBangaloreView HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulationsIssuer of report:HSBC Securities andCapital Markets(India)Private LimitedDisclaimer&DisclosuresThis report must be readwith the disclos
7、ures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,and hair oils are solid,and we expect them to grow at a healthy rate.However,thesesegments have low entry barriers(edible oils)and face input price volatility that is notalways possible to pas
8、s on to consumers.We estimate 75%of Maricos profit pool is stilllinked with commodity-linked products(copra,other edible oils).Strengthening personalcare and the foray in functional food categories is sensible preparation for the long term butthese categories face significant competition from multin
9、ationals.Sensible strategic focus,but challenges remain.Marico is looking to strengthen wellnessand beauty care businesses as a long-term strategy and grow in Asia,the Middle East andAfrica;to this end,it acquired the Paras brands(largely mass market and A INR235 TP.Copra price softening helps margi
10、n expansion and shouldboost earnings growth short term,but challenges in marginal growth areas continue and thestocks rich valuation suggests limited upside.Sustainable earnings growth is a key catalystand copra price volatility constitutes both upside and downside risks to our view.Index BOMBAY SE
11、IDX Enterprise value(INRm)146513Index level 19,487 Free float(%)40RIC MRCO.BO Market cap(USDm)2,620Bloomberg MRCO IN Market cap(INRm)141,868Source:HSBC Source:HSBC,Marico Industries(MRCO IN)Personal Products11 December 2012Financials&valuationFinancial statements,Valuation data,abc,Year to,03/2012a,
12、03/2013e,03/2014e,03/2015e,Year to,03/2012a,03/2013e,03/2014e,03/2015e,Profit&loss summary(INRm),EV/sales,3.7,3.0,2.5,2.1,RevenueEBITDADepreciation&amortisationOperating profit/EBITNet interest,39,6824,844-7254,119-424,48,0756,627-8675,760-610,56,8967,738-9636,775-419,66,6879,176-1,0578,119-397,EV/E
13、BITDAPE*PBFCF yield(%)Dividend yield(%),29.942.511.82.10.3,22.134.27.11.10.4,18.527.55.92.70.5,15.122.84.83.20.6,PBTHSBC PBTTaxationNet profit,4,0034,021-7823,171,5,5345,534-1,3134,149,6,7716,771-1,5235,164,8,1788,178-1,8736,210,*Based on HSBC EPS(diluted)Price relative,HSBC net profitCash flow summ
14、ary(INRm)Cash flow from operationsCapexCash flow from investmentDividendsChange in net debtFCF equity,3,1894,070-1,021-3,314-4701,0222,878,4,1494,421-2,612-8,412-593-4161,557,5,1645,728-1,707-1,292-775-3,6613,755,6,2106,769-1,934-1,477-914-4,3784,541,2382181981781581381189878,23821819817815813811898
15、78,Balance sheet summary(INRm),Dec-10Marico Industries,Jun-11 Dec-11 Jun-12Rel to BOMBAY SE SENSITIVE INDEX,Dec-12,Intangible fixed assets,3,955,5,159,5,159,5,159,Tangible fixed assetsCurrent assetsCash&othersTotal assetsOperating liabilitiesGross debtNet debtShareholders fundsInvested capital,5,018
16、11,5391,58826,1706,3997,6236,03411,43012,526,12,96014,8952,00437,0688,8067,6235,61919,88222,204,13,70320,8045,25843,72111,3937,2161,95824,20123,015,14,58028,1289,63651,92214,2027,216-2,42029,39324,029,Source:HSBCNote:Priced at close of 07 Dec 2012,Ratio,growth and per share analysis,Year to,03/2012a
17、,03/2013e,03/2014e,03/2015e,Y-o-y%change,RevenueEBITDAOperating profitPBTHSBC EPS,26.818.221.56.320.3,21.136.839.838.224.3,18.316.817.622.324.4,17.218.619.820.820.2,Ratios(%),Revenue/IC(x)ROICROEROAEBITDA marginOperating profit marginEBITDA/net interest(x)Net debt/equityNet debt/EBITDA(x)CF from ope
18、rations/net debt,3.327.431.014.912.210.411.451.71.267.4,2.825.326.514.813.812.010.927.80.878.7,2.523.223.413.813.611.918.58.00.3292.5,2.826.623.213.813.812.223.1-8.1-0.3,Per share data(INR),EPS reported(diluted)HSBC EPS(diluted)DPSBook value,5.155.160.7018.60,6.446.440.9730.85,8.018.011.1237.55,9.63
19、9.631.3545.61,2,4,21,32,37,Marico Industries(MRCO IN)Personal Products11 December 2012ContentsInvestment summaryReturns and valuationDomestic FMCG businessInternational FMCG businessKaya,shrinking to growFinancialsDisclosure appendixDisclaimer,12384851,abc3,Marico Industries(MRCO IN)Personal Product
20、s,abc,11 December 2012Investment summary Core domestic businesses are solid,but exposed to volatile input prices;even with premium positioning,pricing power is limited,in our view Marico has augmented personal products through the Paras acquisition an expensive start in advertising-and promotion-int
21、ensive areas International foray a mixed bag;valuation has built in a significantpremium.We initiate coverage with a Neutral rating and TP of INR235,Shaping the portfolioMarico is a diversified fast-moving consumergoods(FMCG)company,which operates insegments such as hair oils,hair care,edible oils,p
22、ackaged food,skin care,health care etc.It has astrong and differentiated leadership position incoconut and hair oil.Marico is also a leadingplayer in the super premium refined edible oilmarket and commands a premium pricing.Thecompany has a strong focus on wellness,beautyand health products as a lon
23、g-term approach tobuilding its businesses.Revenue distribution in FY12Kay a,Marico posted a 19%revenue CAGR over thepast 10 years,supported by acquisitions and apresence in international markets,while earningsgrew at an annualised rate of 20%.Marico has three strategic business units:Domestic FMCG(6
24、9%of total revenue)International FMCG business(IBG;24%oftotal revenue)Retail clinics(Kaya;7%of total revenue)PBIT distribution in FY12,Internationalc onsumer24%,7%,100%80%60%40%20%0%-20%,90%,16%,-6%,Domestic,International,Kay a,4,Source:Company data,DomesticConsumer69%,BusinessSource:Company data,bu
25、s iness,Marico Industries(MRCO IN)Personal Products11 December 2012Domestic FMCG revenue mix for FY13e,Domestic FMCG operating profit pool for FY13e,abc,Saffolaedible oil,Others5%,Saffolaedible oil11%,Others3%,21%,C oconut Oil49%,Hair oil20%,C oconut Oil,Hair oil25%Source:HSBC estimatesDomestic cons
26、umer businessSolid core,leadership and growthThe domestic consumer business accounts for 69%of group revenue and 90%of group PBIT,whichin our assessment represents more than 80%ofthe value in the stock price.Revenue has risen at a CAGR of c17%over thepast five years.However,key challenges are thatth
27、e bulk of the domestic business is exposed tovolatile input prices(copra,vegetable oils such asrice bran and safflower oil).Even though thesalience of coconut oil has declined in revenuemix over time,it remains a very large part of thedomestic business,and in our assessment,it stillrepresents two-th
28、irds of the domestic FMCGoperating profit pool.The core domestic FMCG business has three maincategories.Coconut oil(Parachute,Nihar,Oil of Malabar:c35%share of group sales).In this segment,Segment summary(INRm),66%Source:HSBC estimatesMarico benefits from its market leadership(has57%market share),sc
29、ale and strong brand.Thesegments growth is driven by an increase inconsumption and market share gains from looseand unbranded oil.Marico expects a medium-term sustainable volume growth of 7-8%for thiscategory.The key challenges,in our view,arevolatile copra prices which tend to impactmargins,and exc
30、essive price increases whichpose the risks of down trading anddemand destruction.Edible oil(Saffola:c15%group sales).Withits Saffola brand,Marico has strongpositioning in the health and wellnessplatform and commands a leadership positionin the super premium edible oils category.Volume growth is in d
31、ouble digits and issustainable.Although we view this attractiveand essentially a modern trade-drivencategory,EBITDA margin is in single digitand the barriers to entry are low with several,FY07,FY08,FY09,FY10,FY11,FY12,FY13e,FY14e,FY15e,CAGR,CAGR,(FY07-12)(FY12-15e),Segment net salesDomestic Consumer
32、,12,808,14,884,17,801,18,730,21,874,27,659,33,734,39,971,46,904,16.6%,19.2%,y-o-y growth,16.2%,19.6%,5.2%,16.8%,26.4%,22.0%,18.5%,17.3%,International Consumer,1,930,3,070,4,400,6,020,7,330,9,355,10,858,12,540,14,410,37.1%,15.5%,y-o-y growth,59.1%,43.3%,36.8%,21.8%,27.6%,16.1%,15.5%,14.9%,Skin Care,8
33、31,1,113,1,683,1,857,2,079,2,783,3,611,4,542,5,560,27.3%,26.0%,y-o-y growth,33.9%,51.2%,10.4%,12.0%,33.8%,29.8%,25.8%,22.4%,Source:Company data,HSBC estimates5,11%,MENA,27%,Marico Industries(MRCO IN)Personal Products11 December 2012regional brands and private labels,whichclaim to sell light and heal
34、thy oil with asignificant price differential.Hence,eventhough Marico has premium positioning,International revenue mix in FY12South Africa,abc,with the Saffola brand,in our view,thepricing power is not significant,and priceincreases could risk substitution.Nonetheless,Marico will continue tocommand
35、leadership in this category,but webelieve the scope of margin expansion islimited despite the premium positioning.,SE As ia23%,Bangladesh39%,Value-added hair oils(Parachute Advancedand its variants,Nihar and Hair&Care)accounts for c14%of group turnover.Thissegment has a market share of 25%and isakin
36、 to the personal products segment of otherFMCG players.The value growth in thecategory is over 20%,driven stronglyby volumes.International consumerbusinessPockets of strengths,but presencewide and shallowThis division accounts for 24%of the grouprevenue and 16%of the group PBIT.Bangladesh operations
37、(c39%of IBGrevenue,c9%of group revenue)commandc80%of the branded coconut oil marketshare,which accounts for c90%of theBangladesh segments top line.This leaveslimited scope for further market share gains inthe coconut oil category,and volume growthis likely to be in the single digits.However,value-ad
38、ded hair oil is growing well from alow base,which also benefits from existingdistribution network.Edible oils(Saffola)have not yet taken off.However,themacroenvironment is tough with persistenthigh inflation and a modest GDP growth.6,Source:Company data MENA business(c27%of IBG revenue,6%of group re
39、venue)now has relatively stablemacro-environment and Marico is presentthrough personal grooming categories such ashair creams,gels and value added hair oils.South African business(c11%of IBGrevenue and 3%of group revenue)is arelatively small presence through ethnic haircare market in mass market pos
40、itioning withbrands such as Caivil and Black Chic.SE Asia(c23%of IBG revenue)is presentin Vietnam(ICP acquisition)and Malaysia.ICP has a solid male grooming franchise inVietnam and is growing strongly.Kaya Skin Care businessKaya accounts for c7%of the group top line,butit has been a drag on the comp
41、anys profitabilitydespite having about 10 years of existence.Theearlier perception about Kaya as a specialised skincare clinic with premium positioning restrictedfootfalls and Kaya is now repositioning itself as atotal skin care service provider(cure and care),which caters to both regular and specia
42、lisedconsumer needs.This is helping increase foot fallsand improve product sales,and is favourable foroverall cost economics of the clinics.We areoptimistic about Kayas turnaround,but the,Marico Industries(MRCO IN)Personal Products11 December 2012business is unlikely to be a game changerfor Marico.M
43、aricos strategic approachFocuses on four categoriesMarico focuses on four key categories:1)Haircare hair oil and pre-and post-wash careproducts;2)health care healthy refined edibleoils and functional foods;3)skin care dermatological cosmetic products and services(Kaya)and body lotion;and 4)male groo
44、mingand styling products deodorants and haircreams/gels(Marico has strengthened its footholdin this business through its recent acquisition ofParas from Reckitt Benckiser).Focus on healthy foodsIn addition to areas where Marico has a strongpresence(coconut oil,healthy edible oils,hairoil),it has ent
45、ered new categories such as Muesliand Oats on the back of Saffolas healthpositioning.In our view,this is a good start but isunlikely to be a game-changing strategy.Maricohas already started facing significant pricecompetition and increased advertisement andpromotion(A&P)spend from MNC majors suchas
46、Kellogg.Even with generous assumptions,itadds no more than INR3-4 to the stock price.Nonetheless,its entry into the breakfast cerealmarket gives Marico the experience curve tolaunch processed food categories in the future.Personal products:Male groomingMarico has entered the male grooming spacemainl
47、y through acquisitions,in line with itsstrategy of entering those areas of personalproducts that face limited competition frommultinational corporations.We view this assensible,but such categories are A&P intensiveand are increasingly getting fragmented,especially the deodorant market,which has,witn
48、essed a sharp decline in market shares acrossfor most of the organised players.Our viewsOn average,we like Maricos core areas ofstrength such as hair oil,coconut oil,and edibleoils as we believe Marico has got the act right towin in these categories despite the fluctuations ofinput prices.However,we
49、 believe its foray intothe personal product category may at best be avalue neutral given the substantial sum Maricohas paid in acquiring Paras brands.Healthy foodsare a good start,and Saffola has a strongpositioning in the health and wellness space.However,Oats and Muesli are unlikely to begame chan
50、gers and will add little to the stockprice,in our view.We also expect this segment toface significant competition from multinationals not just in terms of prices,but also in terms ofshelf space.What we like Premium positioning in refined edible oilmarket:Marico has strong brand positioningand scale
