Buy Marico; target of Rs 71: Khandwala Sec

Khandwala Securities is bullish on Marico and has recommended a buy rating on the stock with a target price of Rs 71.

Khandwala Securities report on Marico:

Investments Positives:

Brand portfolio consists of ingrained & naval growth drivers:

Marico’s portfolio consist of well recognized ingrained brands or growth drivers like Parachute, Saffola, Nihar, Hair & care and naval growth drivers like Kaya, Parachute cream, Camellia, Aromatic, Silk n Shine, Fiancée and Hair code. We believe Marico’s strategies to strengthen & further leverage the ingrained brands, keep focusing & coming up with new brands would fuel its growth in faster space.

Broadening wings Inorganically:

Marico is expanding its brand portfolio inorganically. In FY07 it has acquired Fiancée and Hair code in Egypt. Prior to this in 2006 it has acquired four brands, two in domestic market (Nihar & Manjal) and two in Bangladesh (Camellia & Aromatic). We believe in future also Marico will take inorganic route to grow fast.

Scaling up services:

During the FY2007 Marico’s skin care solutions business Kaya broke even. During Q4FY07, Kaya recorded a turnover of Rs 220 million, a growth of 52% over Q4FY06 and a growth of 10% overQ3FY07. Kaya’s revenue for FY07 was Rs 750 million. Kaya Skin Clinic now reaches its customers through 43 clinics in India and 5 in the Middle East. The Kaya consumer base has increased to over 200,000. The management has given guidance of opening 15-20 Kaya skin clinics in FY2008. We believe Kaya’s revenue to grow at CAGR of 40% in the next three years.

Moving up in value chain:

Though Marico Industries has traditionally derived bulk of its revenues from hair oils and edible oils, it has transformed its product portfolio in recent years with the help of higher margin product launches and new category forays. Marico’s strategy to focus more on higher margin products and moving up in value chain helps in improving the margins.

Valuation:
Marico currently trades at P/E multiple of 24X & 19X on 2008 (E) &2009 (E) earnings respectively. We believe its revenue to grow at CAGR16% during FY2007-2009 (E) and profits to grow at CAGR of 28%during the same periods. We initiate our coverage on Marico with price target of INR 71 based on our DCF valuation (WACC 10.5% and Terminal growth of 4%), an upside of ~20%. The stocks would quote at 22x FY09 earnings on our target price.