St

oc

k

Id

ea

Please Refer DISCLAIMER on the Last Page

Date: 05-July-13

CMP: `209 TARGET: `249

Upside: 20%

SENSEX 19496

NIFTY 5868

Eq. Cap. (` Crs) 64.48

Face Value (`) 1.0

M. Cap (` Crs) 13,476

BSE Code 531642

NSE Code MARICO

Financial Year Apr-Mar

52-w H/L 251/180

Avg. Daily Vol. 80,709

TTM EPS (`) 5.62

P/E (x) 37.0x

BVPS (`) 30.88

P/BVPS (x) 6.7x

Dividend Declared 100%

Stock vs. Sensex

MARICO LTD (Marico)

Incorporated in 1988, Marico Ltd (Marico) is one of India's leading Consumer Products & Services Group in the global beauty and wellness space. The company's products and services in Hair Care, Skin Care and Healthy Foods reach out to more than 20 countries in the Middle East, Asian sub-continent, Australia and USA.

Leading player across segments despite increased competition

Coconut Oil: Focus on rigid packs to improve margin going forward

The rigid part (packs in blue bottles) of the portfolio of Parachute, Marico’s flagship brand, recorded a volume growth of ~10% in FY13. The Company has been focusing on the rigid packs over the past few years as they enjoy a higher margin as compared to pouch packs. The proportion of pouch packs has now reduced to < 15% of the total Parachute sales in value terms.

Value added Hair Oil segment: Presence in all key sub-segments

Marico’s Value-added-hair oil brands have performed well over the past few years. The brands continued to record very healthy growths and market share gains during FY13. The volume growth rate was 24% for FY13. Marico’s basket of hair oil brands achieved market leadership position in the Value Added Hair Oils space and now has ~27% share in the Rs. 4500 Crs market.

Saffola: Now a leading healthy lifestyle brand

The Saffola refined edible oils franchise grew by ~7% in volume terms during FY13 compared to FY12. The Company has initiated some price reduction in select packs in order to bring the premium back to sustainable levels. The average price correction was 2% - 3%. The initial response to this pricing adjustment (taken in mid-quarter Q4FY13) has been positive so far and the full impact is expected to be seen from Q1FY14E. The Company expects to return to double digit volume growth rates from FY14E onwards.

Capitalizing on ‘Saffola’ brand: focus on food as an emerging category

In the long term, Saffola expects to establish itself as a leading healthy lifestyle brand that offers healthy food options during all meals of the day. The rise in the number of nuclear households and that of working women provides an opportunity for convenient and healthy breakfast food options.

Youth brands (Set Wet, Zatak, Livon): Tail wind categories with low penetration

The acquired portfolio of youth brands has completed its first financial year in Marico’s hands (comprised 9 months as the transaction was completed at the end of May 2012). The overall performance thus far is quite encouraging. Having stabilized the distribution integration, the company has taken a number of new initiatives in the youth portfolio.

Eyeing more acquisitions to make deeper foray into FMCG market International business (International Business Group) set to recover At the CMP of Rs.209, the stock is trading at 30.1x FY14E and 23.9x FY15E consolidated EPS of Rs.6.95 and Rs.8.76 respectively. We recommend “Accumulate on Dips” in the range of Rs.190-200 with a 12-18 months target price of Rs.249, providing an upside of 20-25%.

ACCUMULATE

Research Desk

Marico Ltd. 2 05-July-2013

Company Profile Bata India continued to be the customer's Most Preferred Footwear Brand

Incorporated in 1988, Marico Ltd (Marico) is one of India's leading Consumer Products & Services Group in the global beauty and wellness space. The company's products and services in Hair Care, Skin Care and Healthy Foods reach out to more than 20 countries in the Middle East, Asian sub-continent, Australia and USA. Marico touches the lives of 1 out of every 3 Indians, through its portfolio of brands such as Parachute, Saffola, Hair & Care, Nihar, Mediker, Revive and Manjal. The international portfolio contributes to ~22% of the Group's revenue, with brands like Parachute, HairCode, Fiancee, Camelia, Aromatic, Caivil, Hercules, BlackChic, Code 10, Ingwe, X-Men, L'Ovite and Thuan Phat.

In addition, the company acquired the personal care business of Paras Pharmaceutical Ltd (PPL) in May 2012. This acquisition has given Marico to access youth brands such as SetWet, Zatak and Livon which rank within the top three positions in hair gels, male deodorant and leave-on hair serum categories. Marico is also present in the Skin Care Solutions segment through Kaya Skin Clinics in India, Middle East and Bangladesh and Derma Rx in Singapore.

Business Model

A significant portion of the Marico's turnover comes from the brands that enjoy leadership positions and have gained significant market shares in their respective categories. Marico’s extensive distribution network in India has a direct reach of ~750,000 outlets and a total reach of ~4 mn outlets.

Presently (after the demerge of Kaya Ltd) the company has 2 business units: Consumer Products Business – FMCG business in India, International Business Group – International FMCG business

Kaya business will now be demerged into a separate Company outside of the Marico Group. This will allow the business to operate in a more entrepreneurial manner and create value for all the stake holders.

Research Desk

Marico Ltd. 3 05-July-2013

INVESTMENT POSITIVES

The only Company with a national presence in Rs.28 bn branded Coconut Oil market 5 yr volume CAGR in rigid packs ~10%. Management has indicated that the medium term volume growth would be in the range of 7-8%

Leading player across segments despite increased competition

Source: Company, LMSPL Research

Coconut Oil: Focus on rigid packs to improve margin going forward

Marico participates in the Rs.2800 Crs (US$ 518 million) branded coconut oil market through Parachute and Nihar. Out of the total coconut oil market about 60% - 65% in volume terms is in branded form and the balance is loose. This loose component provides headroom for growth to branded players. The Company’s brand Parachute, being the market leader, is well placed to capture disproportionate share of this growth potential on a sustainable basis. The rigid part (packs in blue bottles) of the portfolio of Parachute, Marico’s flagship brand, recorded a volume growth of ~10% in FY13. The Company has been focusing on the rigid packs over the past few years as they enjoy a higher margin as compared to pouch packs. The proportion of pouch packs has now reduced to < 15% of the total Parachute sales in value terms.

During FY13, Parachute along with Nihar improved its market share by ~240 bps over the same period last year to 57.6%. The volume growth in Parachute rigid packs during FY13 has been better than expectations. The growth over the past two quarters has been around 5%. The relatively lower growth is mainly on account of expansion in the premium charged by Parachute over loose oil and local and regional players leading to a

Research Desk

Marico Ltd. 4 05-July-2013

Likely Medium term Volume Growth ~ 15-17%

deceleration in new customer acquisition. The Company has already initiated action to bring the premium back to sustainable levels by making adjustments to the pricing in select packs and accordingly the average price correction was ~2% on portfolio as a whole. The initial response is positive and the full impact of the correction is expected in coming quarters.

Marico has continued to drive conversion from loose oil usage to branded oil - a source of growth in the medium term. This is expected to be complemented by share gain in rural areas. Its share in the rural markets, in the range of 35% to 40%, is lower than in the urban markets, thus providing potential headroom for growth. Value added Hair Oil segment: Presence in all key sub-segments

Marico’s hair oil brands (Parachute Advansed, Nihar and Hair & Care) have performed well over the past few years. The brands continued to record very healthy growths and market share gains during FY13. The volume growth rate was 24% for FY13. Marico’s basket of hair oil brands achieved market leadership position in the Value Added Hair Oils space and now has ~27% share in the Rs. 4500 Crs market. This compares to a share of about 17%-18% about 5-6 years ago. There has been a positive shift in market share of ~ 280 basis points in FY13 compared to FY12. These market share gains have been achieved through providing consumers with specific solutions, product innovation, packaging restaging, participation in more sub-segments of the value added hair oils category and penetrative pricing action in others and expansion of Marico’s direct retail reach in the rural markets. Nihar Shanti Amla continues to gain market share and achieved a volume market share of over 25% during FY13 in the Amla hair oils category.

Saffola: Now a leading healthy lifestyle brand

The Saffola refined edible oils franchise grew by ~7% in volume terms during FY13 compared to FY12. The growth during the year was lower than expectations which can be attributed to two reasons: a softer demand environment in premium packaged foods that are discretionary in nature and the inflation in the safflower oil and rice bran oil being significantly higher than the inflation in sunflower oil. This had led to expansion in

Research Desk

Marico Ltd. 5 05-July-2013

Leadership position in super premium refined edible oil segment (58% Volume Market Share) Building scale is a key priority

premium of Saffola vis-à-vis the other refined edible oils. Though the Company doesn’t believe that Saffola’s existing consumers are down trading there is a deceleration in the rate at which new consumers are upgrading into the Saffola brand, leading to a lower growth rate.

Evolution from an edible oil brand to a healthy lifestyle brand

The Company has initiated some price reduction in select packs in order to bring the premium back to sustainable levels. The average price correction was 2% - 3%. The initial response to this pricing adjustment (taken in mid-quarter Q4FY13) has been positive so far and the full impact is expected to be seen from Q1FY14E. The Company expects to return to double digit volume growth rates from FY14E onwards.

The income levels in India have seen an increase over the past few years. It has reached about US$ 1400 from ~US$ 400 a decade back. As a result of this growing affluence, consumers are proactively moving on to healthy lifestyles. Moreover, awareness about health and particularly heart health has been increasing in India which will create demand for Saffola products. The Saffola range of blended refined oils (available in 4 variants) operates in the super premium niche of the refined edible oils market. Saffola is estimated to reach about 3 million households of the 22 million SEC A/B households in India. With rising awareness about heart health in the country, this provides significant headroom for growth. The brand maintained its leadership position in the super premium refined edible oils segment with a market share of ~58% during FY13. Capitalizing on ‘Saffola’ brand: focus on food as an emerging category

In the long term, Saffola expects to establish itself as a leading healthy lifestyle brand that offers healthy food options during all meals of the day. The rise in the number of nuclear households and that of working women provides an opportunity for convenient and healthy breakfast food options. The Company has prioritized the breakfast space in the near term. The intent of the company is to come up with value added offerings. Saffola oats are now available in 6 flavors in the savory oats category. Saffola has a market share of about 13% to 14% by volume in the oats category and has emerged as the No.2 player in the category showing fast paced growth of over 30% p.a. Besides offering oats, Saffola strengthened its position in the breakfast category by introducing Muesli on a national basis. The product is available in 3 variants. The market size of Muesli is estimated to be around Rs.80 Crs - 100 Crs (US$ 14.8 mn to US$18.5 mn) growing rapidly in excess of 40%. Saffola Muesli has already become a No.3 player with an exit market share of ~9%.

Research Desk

Marico Ltd. 6 05-July-2013

Mass skin care market penetration levels are still below 20%

Mass Skin Care: Parachute Advansed Body Lotion

Parachute Advansed Body Lotion has continued to record robust growth rates. It has achieved a market share of over 7% within a short period of time and has become the number 3 participant in the market. The brand gained about 320 bps in market share during the current season as compared to the last season.

Mass skin care market penetration levels are still below 20% resulting in category growth rates of over 25%. The total skin care segment is estimated to be ~Rs.5000 Crs (US$ 926 mn) out of which the body lotion segment is ~Rs.550 Crs (US$ 102 mn). The Company plans to increase its participation in the skin care segment in the longer term.

Youth brands (Set Wet, Zatak, Livon): Tail wind categories with low penetration

The acquired portfolio of youth brands has completed its first financial year in Marico’s hands (comprised 9 months as the transaction was completed at the end of May 2012). The overall performance thus far is quite encouraging. Having stabilized the distribution integration, the company has taken a number of new initiatives in the youth portfolio. Leveraging its portfolio under Code 10 in Malaysia, new formats of hair gels and waxes were launched under Set Wet in India. Set Wet and Zatak deodorants have also undergone a packaging restage to enhance their youth appeal. New fragrances were also introduced.

Set Wet and Zatak had earlier seen some decline in market shares in the deodorant segment given that there was some lack of focus in the hands of the erstwhile owners. This decline has now been arrested and the company expects to reverse the trend and begin gaining share. The turnover achieved from the Youth brands during the year was Rs.139 Crs (US$ 25.7 mn), a

Research Desk

Marico Ltd. 7 05-July-2013

growth of 18% over the corresponding period in FY12. During FY12 the business was being run by Reckitt Benckiser. Over the next few years, the management expects the growth rates to be about 25% supported by new advertisement communication and product launches.

International business set to recover

The year FY13 has been a mixed year one for the international FMCG business. There were some pockets of the business that performed well whereas others faced challenges. The overall business environment in Bangladesh remains challenging as last few months have also seen loss of business days due to “strikes” in Bangladesh. However, long term prospects are good and the Company continues to make investments behind existing and new products such a Value Added Hair Oils (VAHO) and Hair Dye. These products continue to gain traction and are expected to help create a portfolio of the future in Bangladesh. Hair Code hair dye maintained its leadership position with a market share of about 26% in the powdered hair dye market. The launch of Hair Code ACTIVE, a faster-acting variant of Hair Code is expected to add share points to the brand. The Company enjoys a number 3 position in the VAHO (Value Added Hair Oils) market, estimated to be ~Rs.250 Crs (US$46 mn) with ~19% share in a short period since its entry in this segment. The company now offers a bouquet of products such as Parachute Beliphool, a light hair oil with a floral fragrance, Parachute Advansed Cooling Oil and Nihar. The portfolio posted a growth of ~39% during the year FY13 as compared to FY12. The share of VAHO and Hair Dye in the overall top line continues to increase thereby de-risking the company from Parachute coconut oil.

Middle East restructuring & packaging transition led to de-growth in FY13 however the management is confident of a turnaround in 3QFY14E. Additionally, steady performance in South Africa and the strong growth in Vietnam will aid overall International Business Group revenues (targeting over 15% growth) and margins improvement.

Eyeing more acquisitions to make deeper foray into FMCG market

Focused on hair care, skin care and health care in India

Marico is drawing up a multi-pronged strategy to sustain its growth momentum in the FMCG market. The company’s game plan includes new acquisitions, consolidation of its operations, cross-selling opportunities in global markets, revamping its advertising strategy and increased rural

Research Desk

Marico Ltd. 8 05-July-2013

penetration. In FY13, the company’ international FMCG business posted a turnover of Rs.1,007 Crs (US$186 mn) an 8% growth over the previous fiscal. Over the last two years, Marico has clinched two acquisitions, namely the personal care business of Paras and International Consumers Products Corp in Vietnam.

After integrating its newly-acquired brands, Set Wet, Zatak and Livon (from the Paras Personal stable) into its sales and distribution network in India, Marico is currently working on implementing similar strategic plans in global markets. The company has already a sizeable presence in the male grooming and styling segment across various markets. Moreover the company believes, there will be many opportunities for cross-pollination of products despite the fact that it is serving different markets with different brands across the globe.

Strong distribution network

Marico’s rural sales continue to clock a faster pace of growth than its urban sales even though the higher pace in rural is not significant. The continued focus on distribution expansion in rural markets has pushed the exit share of rural sales to circa 32% of total Indian FMCG sales. The Company continues to make investments for the long term behind strengthening the direct distribution in rural areas The Company is also investing behind strengthening other channels such as modern trade, chemist/cosmetic stores to increase the saliency of its existing portfolio and that of the recently acquired youth portfolio. The Company has increased its reach in chemist outlets by 20%+ consequent to the acquisition of the Youth brands Set Wet, Zatak and Livon. It now reaches about 75,000 chemist outlets out of the universe estimated to be around 500,000 outlets. Direct Reach: Over 800,000 outlets + Indirect Reach: ~ 4 million outlets

Leveraged Modern Trade Channel to drive urban growth (~7% of India sales comes from modern trade)

Enhancing quality of rural reach (Appropriate selection of States + Significant gains for the business and reach for the portfolio)

Access to chemist and cosmetic outlets through the latest acquisition

Marico: The Most Awarded FMCG Company

Featured amongst 8 Indian companies in Standards & Poor’s list of Global Challengers

Super brands voted Parachute a Super Brand in UAE & Bangladesh Marico won the Annual Supplier Award by Bharti Walmart and Joint Business

Planning – Best Debutant for 2012 Innovator of the year-Supply Chain for Agro Products” Award by Supply Chain

Leadership Council in 2012 Gold for Saffola Oats and a Silver for Parachute Advanced Ayurvedic at The

APPIES 2012 for innovations in marketing communications across Asia Saffola won a Gold at the Inaugural Mobile Marketing Association Awards

2012 in India Parachute Coconut Oil declared the Overall #1 Brand in Bangladesh by the

Bangladesh Brand Forum 2012. Hair Code in Egypt won an Effies MENA

Research Desk

Marico Ltd. 9 05-July-2013

Peer Group Comparison: Trades at attractive multiples

Source: Capitaline, LMSPL Research

Strong Dividend history

0

20

40

60

80

100

120

140

160

0

10

20

30

40

50

60

70

FY9

5

FY9

6

FY9

7

FY9

8

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

Div

iden

d %

Div

iden

d A

mou

nt

Dividend (Rs. Crs) Dividend (%)

Impressive Shareholding

Source: Capitaline, LMSPL Research

Research Desk

Marico Ltd. 10 05-July-2013

Key Risk

Volatility in the raw material prices like copra and coconut oil, the key inputs.

Intense competition in its hair care and edible oil businesses (esp. from Adani’s Fortune brand).

VALUATIONS

At the CMP of Rs.209, the stock is trading at 30.1x FY14E and 23.9x FY15E consolidated EPS of Rs.6.95 and Rs.8.76 respectively. We recommend “Accumulate on Dips” in the range of Rs.190-200 with a 12-18 months target price of Rs.249, providing an upside of 20-25%.

Source: Company, Capitaline

This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the secure-ties of companies discussed herein and may sell them to or buy them from customers on a principal basis.

Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052. Tel. (022) 4082 4082, Fax (022) 2649 7997. research@lmspl.com www.latinmanharlal.com, LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali,

Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa),

Karimnagar Dist. (Andhra Pradesh)