| Summary of Content | STOCK UPDATE Marico
Cluster: Apple Green
Recommendation: Hold
Price target: Rs153
Current market price: Rs143 Price target revised to Rs153 Key points -
Volume growth momentum: Marico registered a strong volume growth of 21% year on year (YoY; organic volume growth of 14% YoY) in Q1FY2012. This was despite a significant price increase in some of its key brands. However, going ahead the company expects factors like the slowdown in the global economy and the high food inflation and rising interest rates in the domestic economy to have some impact on consumer sentiments which, in turn, is likely to affect the demand for the company's products (especially the discretionary items in its portfolio). -
Situation in international market: The business environment in the Middle East and North Africa region (which contributes 5% to the company's total turnover) remains bleak due to continued political uncertainty in most of the constituent countries (including Libya, Syria and Yemen). Inflation is another key factor which is hurting consumer sentiment in most of the countries in which Marico operates. -
Outlook on copra prices: The copra prices are still higher by 60% on a year-on-year (Y-o-Y) basis. The copra prices have seen a sharp increase on account of two main factors: (1) the link between vegetable oil and crude oil, as the usage of vegetable oils as a non-conventional source of energy increased during a spike in crude oil prices; and (2) an increase in the funds flowing into commodities. Hence, it has become difficult for companies like Marico to revive their strategies. Though the price increases effected in the past in the Parachute franchisee were accepted in the market but the company is reluctant to increase the prices further as doing so might have an adverse impact on the sales volume of Parachute in the current inflationary scenario. -
Gross margins to remain under pressure in the coming quarters: Though the company has taken price increases in its portfolio but the gap persists between the increase in the raw material prices and the price hikes implemented by the company. Hence the gross profit margin would remain under pressure in Q2FY2012 as well. We expect the gross profit margin to be lower by over 500 basis points on a Y-o-Y basis in Q2FY2012. -
Ad spends would vary on a sequential basis: The company has indicated that it will support its focus product portfolio and new launches with adequate advertisement spends and promotional activities. Hence the advertisement spends as a percentage of its sales would vary on a quarter-on-quarter basis. -
Outlook and valuation: The higher raw material cost would continue to put pressure on the margin for the next one to two quarters. However, considering the product portfolio of strong brands and the company's ability to launch innovative products in domestic as well as international markets, we believe the long-term growth story of Marico is intact. Hence, we maintain our Hold recommendation on the stock with a revised price target of Rs153 (based on 23x its FY2013 earnings per share [EPS] of Rs6.7). We maintain our earnings estimates for FY2012 and FY2013 and shall review them after the announcement of its Q2FY2012 results. At the current market price the stock trades at 28.3x its FY2012E EPS of Rs5.0 and 21.5x its FY2013E EPS of Rs6.7. Orient Paper and Industries
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs70
Current market price: Rs62 Annual report review Key points -
Cost inflation offset the revenue growth during FY2011: Inspite of a slowdown in cement (company's core business) consumption during FY2011, Orient Paper & Industries (OPIL) posted an impressive 20.9% revenue growth. This was on account of stabilisation of its new cement capacity, expansion of its market mix and an impressive performance by its electrical division. However, on account of continued losses in its paper division coupled with margin contraction in the cement as well as the electrical division, the company's net profit declined by 10.2% to Rs143.1 crore. -
Segmental performance: The cement division was the major contributor to OPIL's revenues, making for 53% of the total revenues in FY2011 whereas the electrical division and the paper division contributed 33% and 14% respectively. All the three business divisions have reported a double digit revenue growth. However the growth in the paper division (15.9%) was largely on account of the low base effect. The cement revenue grew by 15.5% whereas the revenue from the electrical division grew by 33.6%. In terms of profitability, the paper division continued to post a loss at the profit before interest and tax (PBIT) level (Rs33.3 crore) on account of plant shut down due to water shortage. In addition the PBIT% of the cement as well as the electrical division has contracted due to cost inflation during FY2011. Going ahead, in FY2012 we expect the company to post an expansion in its operating profit margin (OPM) due to surge in cement realisations. -
Key developments during the year: During the year OPIL has finalised an expansion of the cement capacity by 3 million-tonne-per-annum (mtpa) at Gulburga, Karnataka, with an investment of approximately Rs1,700 crore. The funding will be done through a mix of internal accruals and debt. To ensure a regular supply of power, the company is also setting up a 50MW power plant. The plant is expected to commence production after FY2014 and the overall cement capacity will enhance to 8mtpa. In the electrical division the company has planned to add household appliances such as mixers, geysers, coolers, room heaters etc to its products portfolio. In the paper division, to overcome the water shortage issue, the company has set up two water reservoirs to overcome water scarcity. -
Cement business to de-merge, leading to value unlocking for shareholders: In order to unlock value for the shareholders and provide better focus to each of the businesses, the management has recently announced to carry out a de-merger of its cement business. The same will be transferred to a newly formed entity which would be named Orient Cement Ltd (OCL; which will get listed). The paper and the electrical businesses will continue to remain in OPIL. The shareholders of OPIL will get one share in OCL for each share held in OPIL. The appointed date for the said de-merger is April 2012. We believe the development could be value unlocking for the shareholders. -
Debt and cash level: During the year the company borrowed Rs30 crore and the total outstanding debt stood at Rs544 crore. The present debt equity ratio of the company stands at 0.6x which will ensure comfortable debt raising to part fund the Karnataka plant. On the other hand the cash level increased by Rs12 crore and stood at Rs59 crore. Further the company has made an additional investment of Rs19 crore (in a liquid mutual fund scheme) and the total investment made stood at Rs66 crore. -
Increase in working capital cycle affects operating cash flow: The debtor days increased to 45 in FY2011 as compared to 42 in FY2010 while the inventory days decreased to 31 for the year as against 34 in the previous fiscal. The creditor days decreased to 62 as compared to 65. Hence with the increase in the working capital cycle and contraction in the profitability, the net cash flow from operating activities declined to Rs234.4 crore in FY2011 as compared to Rs261.9 crore in FY2010. -
Return ratios are comfortable: Due to an increase in capital employed, the return ratio was adversely impacted during the fiscal. The return on capital employed (RoCE) declined to 18.4% in FY2011 (as against 22.3% in FY2010) and the return on net worth (RoNW) decreased to 16% in FY2011 (as against 20.8% in FY2010). -
Maintain Buy with target price of Rs70: Due to the supply discipline mechanism followed by the manufacturers in the southern region, the company is being benefited in terms of strong growth in realisations. But going ahead we expect the cement price to come under pressure with a likely increase in supply. However, the company's efficient cost structure gives it an advantage over other players. Further the company is in the process to introduce a range of new products in the electrical division which could lead to strong revenue growth in the electrical division. Further, in addition to a strong balance sheet and attractive valuation, the demerger of the cement division will act as a re-rating factor for the stock. Hence we maintain our Buy recommendation on the stock with a price target of Rs70. At the current market price, the stock trades at a price earning (PE) multiple of 5.6x and enterprise value (EV)/ EBIDTA of 3.6x, discounting its FY2013 estimated earnings.
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