Stock Idea - Marico

Recommendation: Buy

CMP = Rs 65 (at the time of this recommendation)

Price target: Rs 77

Key points:

• Consumer spending patterns in India are gradually changing due to factors like rising aspiration levels, increasing income levels, growing brand consciousness and easy availability of credit. Not only that, an average urban household is also becoming increasingly conscious of beauty and health, and aware of the benefits of personal care.
• Despite this, according to a survey carried out by AC Nielsen, 30% of Indians are willing to spend more on beauty products and treatments to enhance their appearances. To tap this enormous opportunity several retail and FMCG companies have entered or are planning to enter the Rs 25,000-crore health & beauty retail segment in India. The operating profit margin (OPM) in this segment lies in the 20-25% range.
• Marico is leveraging its strength in the beauty and wellness segment through Kaya, which is recognised as a pioneer in skin care and beauty services. Kaya, which currently has 56 skincare clinics in India and nine such clinics in the Middle-East, contributed around Rs 98.5 crore to Marico's total revenues during FY2008.  
• The growing urbanisation of Indian cities and acceptance of specialised products and services provides a good opportunity for Marico to strengthen its roots in the low penetrated health and beauty segment in India. We believe that going forward Kaya would be one of the growth drivers for the company. However, the profitability of the company as a whole would be under pressure in the near term on account of a steep increase in the prices of its key raw materials. 
• At the current market price of Rs 64.6, the stock trades at 20.9x and 16.7x its FY2009E and FY2010E EPS of Rs 3.1 and Rs 3.9 respectively.
• I maintain Buy recommendation on the stock with a price target of Rs 77.