| Summary of Contents | | | STOCK UPDATE Marico
Cluster: Apple Green
Recommendation: Hold
Price target: Rs130
Current market price: Rs128 Annual report review Key points -
FY2010?strong profitability performance: It was yet another year of a double-digit volume growth for Marico with its sales volume growing by a healthy 14% year on year (yoy) in FY2010 (12%yoy in FY2009). However overall revenue growth stood moderate at 11%yoy on account of a price reduction undertaken by the company to improve the sales volume and market share in its flagship brands. Despite lower value growth, the operating margins saw strong improvement due to a sharp year-on-year (y-o-y) reduction in the raw material cost. This along with a lower interest cost led to a strong 31%yoy growth in the bottom line. -
Increase in working capital days: The company?s debtors? turnover ratio increased from 15 days in FY2009 to 18 days in FY2010. This was on account of an increase in contribution of international business to overall turnover. The debtors? norms are higher in international markets compared to that in India. Inventory days have increased from 46 days in FY2009 to 54 days in FY2010 mainly on account of a strategic build up of low cost raw material ? copra and safflower during the year. Thus the overall net working capital days stood at 58 in FY2010 as against 45 days in FY2009.
However despite Rs129 crore of cash blocked in the working capital, the cash generated from operations stood at Rs269 crore in FY2010 as against Rs215.2 crore in FY2009. -
Debt on books to reduce in FY2011: The company?s debt stood at Rs446 crore as on 31st March 2010. This included US dollar denominated debt of Rs186 crore and the remaining was accounted by the rupee denominated loan. The company indicated that it will repay its dollar denominated debt of around Rs147 crore and rupee debt of Rs229 crore within a year. Thus we expect the debt: equity ratio to improve to 0.1x in FY2011 from 0.7x in FY2010 (unless there are no major acquisitions in domestic or international markets). We also expect the interest cost of the company to come down substantially in the coming years. -
Return ratios remain strong: The company?s return ratios continue to remain strong with return on net worth (RoNW) and return on capital employed (RoCE) standing at 46% and 36% respectively in FY2010. -
Outlook and valuation: With sustenance of steady volume growth in the flagship brands and strong growth in the international business, we expect Marico to post a good earnings performance in the coming years. Also the company?s thrust on entering into newer categories and launching new products / variants (especially in health and wellness segment) augurs well for the company from the longer term perspective. Hence we like Marico on the back of its good earning visibility in the mid-cap fast moving consumer goods (FMCG) space. However in view of the limited upside from the current level, we maintain our hold recommendation on the stock with a price target of Rs130. At the current market price the stock trades at 26.2x its FY2011E earnings per share (EPS) of Rs4.9 and 21.5x its FY2012E EPS of Rs5.9.
SHAREKHAN SPECIAL Monthly economy review Economy: Inflation moderates to single digits -
In June 2010, the growth of the Index of Industrial Production (IIP) moderated to a single-digit level of 7.1% year on year (yoy). The slowdown in growth was led by a lower growth in the manufacturing segment coupled with a higher base year figure. Going ahead, industrial growth is expected to remain in single digits as the low base of the previous continues to wear off. -
Inflation for July at 9.97% eased to single digits after remaining in double digits for the previous five months. The moderation in inflation was due to an easing up of prices of manufacturing goods coupled with a higher base. Going ahead, inflation is likely to moderate further as (1) the low base effect wears off; (2) food prices moderate after the monsoon, which has been normal thus far; and (3) the impact of the recent rate hikes undertaken by the Reserve Bank of India (RBI) during its last monetary policy review meet come into play. -
The trade deficit for June 2010 came in at $10.55 billion, widening by 12.2% yoy but narrowing by 7% on a month-on-month (m-o-m) basis. Exports continued to expand for the eighth consecutive month and increased by 30.4% yoy. In order to support the export growth the commerce ministry introduced sops worth Rs1,052 crore to exporters, particularly for the labour-intensive textile, handicraft and leather sectors. -
The US Federal Reserve (Fed) has said that the pace of economic recovery is likely to be more modest in the near term than had been anticipated and that it would take more aggressive action to keep the recovery on track if needed (read more under Global round-up). Banking: RBI hikes key policy rates, narrows LAF corridor -
In the quarterly review of the monetary policy, the RBI hiked the repo and the reverse repo rates by 25 basis points and 50 basis points to 5.75% and 4.5% respectively. By hiking the key policy rates the RBI has reiterated its focus of easing inflation and anchoring inflationary expectations. The steeper hike in the reverse repo rate has led to the narrowing of the rate corridor. The action seems to be driven by a desire to add teeth to the monetary policy tools, thereby ensuring the desired transmission of policy rate actions. -
The credit offtake (non-food) registered a growth of 19.9% yoy (July 30, 2010), lower than the 22.3% year-on-year (y-o-y) growth seen during the previous month (July 2, 2010). -
The deposits registered a growth of 14% yoy (as on July 30,2010). The deposit growth has been lagging the credit growth; as a result banks have recently hiked the deposit rates because of which the deposit growth is expected to improve going ahead. -
The credit-deposit (CD) ratio contracted to 71.3% (as on July 30, 2010) as compared to 72.3% as on July 2, 2010. -
The liquidity situation improved during the month as the average deficit during the month-till-date (MTD) period (August 2-20, 2010) stood at Rs73 billion as compared to Rs538 billion during the same period in the previous month. However, the RBI during its post-review conference call had indicated that liquidity is likely to remain tight during the current financial year. -
The yield on government securities (G-Secs; ten years) stood at 7.93% as on August 20, 2010, up by 30 basis points from the previous month?s level and close to the high last seen in May 2010, as traders trimmed positions on concerns that further issuances in the paper may taper off. The G-Sec yields of all other maturities too increased during the month despite a fall in the yields globally. Equity markets: FIIs remain net buyers -
During the MTD period (August 1-20, 2010), the average daily volumes contracted in the futures and options (F&O) segment while expanding in the cash segment. -
During the MTD period in August 2010 (August 01-19), the foreign institutional investors (FIIs) were net buyers while mutual funds (MFs) were net sellers. -
The total industry average assets under management (AUM; equity + debt) contracted by 1.5% mom during July 2010. -
The net resources mobilised in equity MF schemes during June 2010 stood at negative Rs3,207 crore as redemption resources outpaced the resources raised through the new and existing schemes. Insurance: Life Insurance growth strong aided by low base -
The life insurance industry posted a 67.9% y-o-y growth in the annualised premium equivalent (APE) in June 2010 led by Life Insurance Corporation of India (LIC) and aided by the low base of the previous year. Going ahead, as the low base begins to wear off the full impact of the recent regulatory changes on the APE growth will become more prominent. -
In June 2010, the gross premium underwritten for the general insurance industry grew by 29.3% yoy. The private sector players posted a strong growth of 30.6% yoy while the public sector players registered a growth of 28.5% yoy during the month. |
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