Marico

Recommendation: Buy
Price target: Rs70
Current market price: Rs60

Q3FY2008 results: First-cut analysis

Result highlights

Marico's sales growth in Q3FY2008 was in line with our expectations. The company posted a strong top line growth of 23.7% year on year (yoy) in Q3FY2008 to Rs506.2 crore aided by an impressive performance across businesses. The impressive top line growth was a result of a 19% organic growth and a 5% inorganic growth.
Affected by a hefty 34% year-on-year increase in the staff cost and a higher than expected increase in the other expenses (up 32.9% yoy to Rs81.2 crore) the operating profit margin declined by 79 basis points to 12.68%. Thus, the operating profit grew by 16.4% yoy to Rs64.2 crore.
The raw material cost was under check as copra prices during the quarter were lower by about 10-12% yoy. However, the input cost for edible oils continued to rise and was up 20-30% across categories.
A much higher other income of Rs7.53 crore (against Rs0.33 crore in Q3FY2007) and a lower tax incidence aided a strong 81% rise in the adjusted net profit to Rs50.2 crore.
The company changed the method of charging depreciation on factory building that led to a one-time charge of Rs4.29 crore; after this the reported net profit stood at Rs45.9 crore, which was up 61.5% yoy.
Marico continues to implement its three-pronged growth strategy of enhancing the existing products, introducing new products and achieving inorganic growth through acquisitions. During the quarter it entered the South African ethnic hair care and health care markets by acquiring the consumer division of Enaleni Pharmaceuticals, which has an annualised turnover of ~Rs53 crore.
We remain positive on Marico's businesses and maintain our Buy recommendation on the stock with a price target of Rs70. At the current market price of Rs59.7 the stock trades at 17.9x our FY2009E earnings per share of Rs3.34.