Slowdown is impacting the rate of acquisition of new consumers for Marico, which is showing up in sales volume growth in segments like Saffola edible oil, says Nomura Equity Research

Marico reported Q3FY13 results that were 7.5% lower than expectations at the net sales level, but higher gross margin improvement led to EBITDA coming in 2% ahead of Nomura’s estimates with net income largely in-line. Volume growth in the domestic business was 9%, although parts of the portfolio, such as Saffola edible oils (4% volume growth), saw a significant slower growth. In these segments like Saffola edible oils, the slowdown is impacting the rate of acquisition of new consumers, which is showing up in volume growth. This is based on the analysis of the third quarter results of Marico by Nomura Equity Research.

The international business was a disappointment, with the overall segment continuing to report slow growth of 3%. While gross margin performance was positive in the quarter, the slowdown in volume growth would be a concern, in Nomura’s view.

Nomura expects a significant increase in advertising and promotional (A&P) spends going forward. Marico trades at 23x FY15F P/E versus mid-cap peers such as Godrej Consumer at 20.5x and Dabur India at 20.6x. Nomura maintains its ‘Neutral’ rating on Marico.

Key highlights from Q3FY13 results of Marico include:

(a) Net sales of Rs11.64 billion, up 11% year-on-year. Organic volume growth in the domestic business during the quarter was 9%. 

(b) Gross margins improved by 420 basis points year-on-year to 52% as input prices continued to be benign. Copra prices were down 23% on a y-o-y basis; however, they have started to see some uptrend recently. Prices of safflower oil were up 52%, while rice bran oil was down 1% on a year-on-year basis. 

(c)EBITDA came in at Rs1.62 billion with margins +215 bps year-on-year. As expected, advertising & promotion spends remained high (150 basis points increase year-on-year), which it is believed will continue to remain at elevated levels as the company supports existing brands and youth brands such as Set Wet, Zatak and Livon. 

(d) Adjusted net profit came in at Rs1.023 billion, up +21.6% year-on-year

Segmental highlights from Q3FY13 results include

(a) Volume growth in the Parachute hair oils segment was 6%. As at the end of CY12, Parachute and Nihar together had a market share of 57.8% in the Indian Parachute hair oil segment, up 390 basis points year-on-year.

(b) The Kaya business achieved a turnover of Rs785 million, growing by 5% on a year-on-year basis. Kaya business in India and the Middle East achieved same store sales growth of 4% during the quarter.

(c)Youth brands (Set Wet, Zatak and Livon) recorded revenues of Rs430 million during the quarter, growing by 18% year-on-year.