BNP Paribas initiates coverage on Marico with `Buy' rating

MARICO

RESEARCH: BNP PARIBAS

RATING: BUY

CMP: Rs 58.85

BNP Paribas initiates coverage on Marico with a `Buy' rating and a price target of Rs 70. Marico generates 75% of its revenue from domestic FMCG, which has been largely unaffected by the current slowdown. BNP expects strong volume growth with margin expansion to drive an EPS growth of 22% in FY09-11.

Marico's "Parachute" brand has maintained market share over the past two years, with volume growth of 11-12 % pa driven by the consumer shift from loose unbranded oil to branded oil. The positioning of "Saffola" edible oil has been successfully transformed from a 'curative' product to a 'preventive' measure, thus driving increased penetration.

Although premium skin care is discretionary spending and likely to slow in the current environment, it provides Marico with a strong long-term growth avenue. BNP expect Kaya clinics to grow to 8% by FY11 from 5% of revenue in FY08 on aggressive new clinic additions, and contribute 7% of net profit versus almost 0% in FY09.

Marico is also exploiting the power of its two key brands by extending them to new products/variants, although our estimates do not include any revenue from these new products. The target price based on 20x FY10 EPS, based on a PEG (price earning to growth ratio) of 0.9x, is in line with the historical 4-year average.