Maintain REDUCE on Marico - Saffola shines with PCNO recovery, muted margin - HDFC Securities

Mr. Varun Lohchab, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

Marico's result was a mixed bag as the company surpassed our expectations of revenue growth, but the margin remained underwhelming. Revenue growth was driven by a strong recovery in PCNO (val/vol growth of 8/10% YoY) and sustained growth in Saffola (val/vol growth of 16/20% YoY). VAHO clocked -1/+4% YoY val/vol growth as it saw a recovery in the mid to bottom of the pyramid, but the premium segment continued to struggle. International saw a recovery, led by Bangladesh and South Africa. However, margin expansion was underwhelming due to RM inflation and adverse product mix (low VAHO and high Saffola). ASP remained lower than the previous year but saw sequential growth. We expect the company to ramp up its ASP in 2HFY21 led by healthy new launches. We expect healthy revenue growth in 2HFY21 while margin expansion should be muted due to rising ASP, RM inflation and overhead cost returning to normal. We expect PCNO and VAHO to continue recovery and Saffola's growth to remain healthy. We maintain our EPS estimates for FY21/FY22/FY23. We roll forward our target price to Sep-22E EPS and value Marico at 35x P/E to derive a target price of Rs 360. Maintain REDUCE.

Healthy revenue growth: Net revenue grew by 9% YoY (flat in 2QFY20 and -11% in 1QFY21) beating our expectation of 6% YoY growth. Domestic business val/vol grew by 8/11%. Rural growth (+22% YoY) remained ahead of urban (+14% YoY). MT and CSD continued to struggle due to consumers remaining wary of venturing into large stores. E-comm saw robust growth of 39% YoY (8% revenue mix) and the company expects the channel to continue gaining salience. International saw healthy 12% YoY growth with 7% CC growth, led by strong performance in Bangladesh and South Africa.

Margins underwhelming: GM contracted by 163bps YoY (+565bps in 2QFY20 and +112bps in 1QFY21) vs an expectation of +36bps YoY expansion. Employee/Other expenses grew by 8/4% YoY while ASP declined by 4% YoY. However, ASP stood at Rs 1.9bn, up from Rs 1.4bn in 1QFY21. EBITDA margin saw an expansion of 26bps YoY to 19.6% (+329bps in 2QFY20 and +298bps in 1QFY21). EBITDA grew by 10% YoY (HSIE 15%). India/International EBIT grew by 9/18% YoY. PBT grew by 10% YoY while APAT (ex-exceptional items) grew by 15% YoY.

Call takeaways: (1) Channel inventory remained below pre-COVID level; (2) increased salience for healthy foods within snacking will continue to drive Oats; (3) the company does not intend to take any significant pricing action as raw material inflation is expected to be benign after December 2020; (4) MT is expected to post strong revival in 2HFY21; (5) the company is using its strategies from Bangladesh in Vietnam to improve its market presence.

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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