We upgrade Marico to buy (earlier add) with a revised target price to Rs 330 (earlier Rs 295), based on a P/E of 27x (at ~15% discount to sector average). Inexpensive valuations add another layer of comfort. We under-appreciated Marico?s pricing power in the current soft demand environment, resilient volume growth despite significant price hikes in Parachute has proven otherwise. Modest valuations of 24x Q2FY16e revised EPS (~25% discount to sector average multiples) and robust earnings CAGR of 18% over FY14-17e lend further comfort.
Over the past 12 months copra has witnessed significant inflation driven by a severe summer and a failed north-east monsoon last year, which led to a sharp decline in coconut productivity in Tamil Nadu and Kerala. We note copra prices touched a peak of Rs 115 per kg a month ago and are now ranging Rs 105-110 per kg. Historical trends suggest that a copra inflationary cycle generally lasts 12-18 months and ends with a correction of ~30-40% from peak levels. We expect copra prices to moderate from February 2015 (upcoming flush season for copra) notwithstanding poor north-east monsoons again this year. Even if copra prices do not correct in absolute terms, copra inflation may subside significantly as base effect kicks in. Hence, even if copra prices remain in the Rs 105-110 range, y-o-y inflation in copra would fall to ~50% in Q3FY15e and ~30% in Q4FY15e.
In the past copra inflationary cycles, Marico?s margins had expanded when copra corrects as Marico tends to retain price hikes in key SKUs (apart from recruiter packs).
By Kotak Institutional Equities
