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Marico - Strong performance across portfolio - ICICI Securities

Posted On: 2020-10-29 05:46:30


2Q volume growth of 11% was a sharp recovery driven by growth in 95% of portfolio. Likely market share gains in Parachute, recovery in value-added hair oils (VAHO) and continued growth momentum in Saffola edible oils (more importantly, through increased penetration and retention) inspire confidence on sustained growth momentum. We like its focus on prioritising market share over margins in the near-term (some input cost inflation seen). We reiterate that new launches in healthy foods portfolio is likely to provide another leg to growth (targeting ~Rs5bn revenue in FY22 (Rs2.5bn in FY20)) and a potential stock re-rating trigger. A resilient international portfolio adds to potential outperformance. Reiterate ADD.

In the results conference call, this analyst sought clarity about "extension of Saffola brand into Ayurvedic products like Chyawanprash and consumer insights". Management response was that Saffola brand has strong health equity (having evolved from a therapeutic positioning to preventive to health focussed). It plans to extend Saffola into a more modern Ayurveda offering given the increased consumer focus on immunity and prevention.

- Revenue back to growth trajectory across portfolio: Consolidated revenue / EBITDA / recurring PAT grew 9% / 10% / 15%. Domestic revenue grew 8% driven by 11% volume growth with improving consumer sentiment, supply chain operations returning back to pre-Covid levels and 95% of product portfolio returning back to YoY growth trajectory. This performance was also driven by strong rural performance of 22% volume growth (rural now contributes to ~35% of overall business as compared to ~32% earlier).

- Segment performance: Parachute revenue grew 8% with 10% volume growth driven by likely market share gains led by direct distribution. Value added hair oils (VAHO) returned to volume growth trajectory (+4% volume, -1% value) despite CSD channel being impacted (+7% volume ex-CSD). Saffola edible oils continued its strong performance (+20% volume, +16% value), benefitting from increased penetration and higher retention which together contributed 62% to this growth. This performance was despite significant headwinds in MT and CSD channels where Saffola has higher salience. In other categories, healthy foods grew 55% in value terms while Premium personal care segment reported declined (Discretionary within Staples). Hygiene segment contributed ~1.5% of domestic revenues.

- International business: Revenue grew 7% in constant currency terms (+12% reported) driven by significant outperformance in Bangladesh (+16% in cc terms) and revival in South Africa (+16% in cc terms) while other international markets were impacted with supply chain disruptions and macro headwinds - South East Asia (-4% in cc terms), MENA (-6% in cc terms).

- Margin expanded a tad, mitigating input cost headwinds by rationalisation in A&P spends and cost controls: Consolidated gross margin declined 160bps to 48% driven by input cost inflation in copra and rice barn oil. However, consolidated EBITDA margin expanded 25bps to 19.6% primarily driven by rationalisation in A&P spends (-130bps YoY) with cuts in spends on discretionary products while maintaining share of voice in core portfolio and decline in other expenses (-60bps YoY) due to cost saving initiatives. Management expects Copra prices to stabilise by 4QFY21.

- Valuation and risks: We cut our earnings estimates by ~1%; modelling revenue / EBITDA / PAT CAGR of 7 / 10 / 10 (%) over FY20-22E. Maintain ADD with DCF-based revised target price of Rs415 (earlier Rs420). At our target price, the stock will trade at 39x P/E multiple Sept-22E. Key downside risk is higher-than-expected inflation in copra prices.

Shares of MARICO LTD. was last trading in BSE at Rs.362.15 as compared to the previous close of Rs. 363.1. The total number of shares traded during the day was 122655 in over 4119 trades.

The stock hit an intraday high of Rs. 364.8 and intraday low of 355.4. The net turnover during the day was Rs. 44261413.


Source: Equity Bulls

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