Marico’s second-quarter fiscal 2016 revenue was up a modest 4% from last year's high base, while earnings moved up sharply by 27%. The India business recorded revenue growth of 4% and volume growth of 6% as the company took price cuts (of 6%) in its largest hair oil brand, Parachute, to remain competitive in a deflationary environment. As a result, the brand recorded value growth of 9% and volume growth of 11%. Growth in its international business (22% of sales) was muted at 2%, as sales in its largest market, Bangladesh (45% of international) declined by 11%. The company has taken an 8% price reduction in Bangladesh, where it holds 81% market share in hair oils. This should help fend off competition, and should begin to produce results in the second half of the year. We retain our estimates for 2016, including a target of 22% revenue growth from India, and 11% from international, as the price cuts already taken could help Marico recover momentum in the second half. We are, however, upgrading our fair value estimate for this narrow-moat stock by 5% to INR 380 per share as we adjust for the time value of money since our last fair value estimate update in June. The stock fell 8% in the past three months, and is now fairly valued (trading in the 3-star range).
Marico reported first-half earnings per share of INR 6, in line with our 2016 forecast of 12 EPS. Our long-term forecast of 21% annual earnings growth over five years is unchanged; the numbers reflect EBIT margin expansion as the firm moves to higher-margin categories. We stick to our 17% EBITDA margin forecast for 2016, which Marico has already touched in the first half. Management revised its guidance to achieving 17% EBITDA for the year, versus 15%-16% previously. This matches our forecast, as the geographic segments of both India (EBITDA 17%) and international (EBITDA 16%) report healthy margins supported by gross margin expansion through commodity deflation (despite price cuts and advertising spends).
Management remains open to the possibility of growth through acquisitions, although it admits that it may have been a mistake to focus on the 'hypercompetitive' deodorants segment, instead of the high-margin hair gels and serum portfolio of the Paras brands that Marico acquired in February 2012. While we are impressed by this open admission by management, we think it would be wise for them to focus on their existing products and not to undertake further acquisitions at the moment. The Indian mergers and acquisitions market remains heated, with the most recent consumer deal (of Kesh King, an Ayurvedic solution for hair falling out) going at 5.5 times sales to competitor Emami in June 2015. Overall, we believe Marico is a Standard allocator of shareholder capital.
