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STOCK UPDATE

Marico 
Cluster: Apple Green
Recommendation: Buy
Price target: Rs77
Current market price: Rs50

Annual report review

Key points

• Marico's net sales increased by 22.5% to Rs1,906.7 crore in FY2008 from Rs1,556.9 crore in FY2007. The sales growth was achieved on the back of a strong volume growth of 13%, a price hike of 5% and an inorganic growth of 4.5% during the year.
• Marico's focus portfolio delivered a strong performance in FY2008. Its flagship brand Parachute, premium edible oil brand Saffola and hair oil basket achieved a healthy volume growth of 11%, 22% and 16% respectively during the fiscal.
• During FY2008, despite a rise in the number of creditor days to 57.6 from 54.8 in FY2007, the working capital cycle increased from 27.5 days to 33.5 days on account of an increase in both the inventory (from 41.5 days in FY2007 to 46.1 days in FY2008) and the loans & advances (from 14.6 days in FY2007 to 17.0 days in FY2008). 
• With a good growth in the bottom line, the RoNW improved to 63.3% from 45.1% in FY2007. The RoCE increased to 39.8% from 32.9% in FY2007. Also, the huge improvement in the return ratios was possible on account of the restructuring of the balance sheet undertaken by the company in FY2007 (including an adjustment of the intangible assets against the special reserves to the extent of Rs309 crore). 
• Marico is aiming at rationalising its portfolio to focus on its beauty and wellness business. It divested its processed food business operated under the brand Sil to Scandic Food India Pvt Ltd, the Indian subsidiary of Good Food A/S, for a profit of Rs10.6 crore in FY2008.
• The growing urbanisation of the Indian population and the increasing acceptance of specialised products and services provide a good opportunity for Marico to strengthen its roots in the country's lowly-penetrated beauty and wellness segment. To become a major player in this segment the company is continuously looking to expand its focus portfolio in both organic and inorganic ways. 
• Though we like Marico's strategy of achieving an inclusive growth through organic and inorganic initiatives, we believe its profitability will remain under pressure in the near term because of its surging input cost and higher marketing spends. Consequently, even though we expect a good 18.8% growth in its top line, we foresee a nominal growth of 9.9% in its bottom line to Rs185.8 crore in FY2009.
• At the current market price of Rs50, the stock trades at 16.2x and 12.7x its FY2009E and FY2010E earnings per share (EPS) of Rs3.1 and Rs3.9 respectively. We maintain our Buy recommendation on Marico with a price target of Rs77.

VIEWPOINT 

Edelweiss Capital

Focus on diversification

Q1FY2009 result highlights

• Edelweiss Capital (Edelweiss) reported a top line of Rs268.9 crore in Q1FY2009, indicating a growth of 87.1% on a year-on-year (y-o-y) basis, but a decline of 33% on a quarter-on-quarter (q-o-q) basis. The sequential decline of 33% reflects the changed dynamics for the industry and the company, as it is in stark contrast with a 25% q-o-q growth seen by the company in the previous quarter.
• From the revenue stream perspective, the sequential decline in the revenue stems from weakness in fee and commission segment (down 38.7%) and 'treasury, arbitrage and trading' income (down 47.7%). The weakness in these segments outweighed the strong growth in investment and dividends, which nearly doubled on a sequential basis.
• The operating expenses, in line with the decline in the top line, too registered a decline owing to semi-variable nature of certain expenses. The operating expenses stood at Rs115.5 crore, up 88% on a y-o-y basis, but down 33% on a q-o-q basis.
• Consequently, the bottom line came in at Rs63.8 crore, indicating a 23% sequential decline. The sequential decline in the bottom line, though disappointing reflects the industry dynamics characterised by declining brokerage volumes and weaker investor interest.