Buy Marico; target Rs 185: Motilal Oswal

“Marico (MRCO)’s volume growth momentum continued, led by 16% volume growth in the domestic business; consolidated organic volume growth was 13%. Increased focus on rural markets was a key contributor to volume growth; share of rural sales has increased to 30% for 9MFY12 as against 27% in FY11. Consolidated gross margin expanded by 120bp to 48.5% after six consecutive quarters of YoY margin decline; the expansion was led by price increases in the domestic portfolio and fall in copra prices. Consolidated EBITDA margin contracted by 70bp to 11.5% due to higher ad expenses (up 170bp) and staff costs (up 80bp). MRCO has booked prior period expenses of INR130m pertaining to Kaya Middle East in 3Q; excluding this, EBITDA margin would have been higher by 120bp at 12.7%.”

“We are revising our earnings estimate for FY13 by 12% and are introducing our EPS estimate for FY14 at INR8.9. We are also upgrading our recommendation on the stock to Buy. This follows strong operating performance in 3QFY12 and improved visibility of higher medium-term growth. Our SOTP-based target price is INR 185 (we have valued the domestic consumer business at 22x FY14E earnings, the international business at 12x FY14E earnings and Kaya at 0.7x sales),” says Motilal Oswal research report.

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