We upgrade Marico Industries (Marico) to ‘outperform’ with a target of R245 (from R230) as the performance of its core brands has improved and is likely to get better in FY15e. We are confident of a turnaround in international business and valuations at 25x FY15e P/E appear reasonable compared with peers.
We see an upside to its estimates from potential margin surprise in international markets and correction in copra prices. Concerns over domestic sales, higher copra prices and the international businesses have led to the stock underperforming the FMCG sector by 15% and the broader market by 21% in last 12 months. We believe the stock is currently pricing in all the negatives.
We see a better performance in the international market and a fall in copra. We estimate FY15 OPM to fall 130 bps y-o-y due to a spike in copra. The impact of copra inflation is well known and largely priced in, in our view. However, any softening in copra prices may lead to a significant upside to our earnings — EPS growth stood at 31%, 29% and 23% in FY06, FY10 and FY12, respectively, when copra prices had corrected.
Management’s confidence of higher sales growth and margins in international markets owing to a turnaround in Bangladesh and MENA could lead to earnings upside, in our view.
We saw an improved performance in Q4 FY14. Domestic volume growth improved to 6% (against 3-4% in Q3 and Q3) aided by price hikes, sales growth was higher at 16%. Volume growth improved in Parachute (+10%) and Saffola (+11%) but moderated in hair oils (+5%).