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Broadly in-line quarter, outlook remains steady — Upgrade to LONG
MRCO’s 4Q consolidated sales grew 9% yoy to Rs 16.1bn, in line with EE. India volumes were up 8% yoy (consolidated volume growth: 8%) as the Saffola business recovered and the Parachute rigids portfolio saw a steady 6% growth. Consolidated EBIDTA grew 12% yoy to Rs 2.83bn (5% below EE). Consolidated gross margins improved qoq to 49.04% as RM cost inflation eased in copra and packaging materials, and subsidiary performance improved. We expect volume growth for MRCO to remain steady in FY20 aided by Parachute rigids, and a gradual recovery in Saffola and VAHO volumes off a low base. We broadly maintain FY20/ FY21 estimates and expect a gradual gross-margin recovery from here on. Post the recent correction risk reward has become favourable and hence we Upgrade the stock to LONG with a Jun’20 TP of Rs 396 (Jun’20 TP: Rs 390) at 43x TTM EPS of Rs 9.2.
Parachute rigid volumes steady; Livon picks up:
Parachute rigid volumes grew 6% (4QFY18: -5% yoy) led by market share gains. MRCO’s strategy to shore up coconut oil volumes bore fruit, with Nihar Naturals and Oil of Malabar — at the category’s lower end — growing well. Growth in the male grooming portfolio weakened to 3% in 4Q (3QFY19: +13%), while the category grew 22% for full year; MRCO will continue to develop this category as a future growth driver. Livon serums grew 38% yoy, with many new products launched under the brand. Copra prices were down 19% yoy and have started softening post the spike owing to cyclone Gaja. We build in FY20/FY21 volume growth for Parachute rigids at 6%/6%.
Saffola edible oil volumes bounce back, focus increases on foods:
Post several disappointing quarters, Saffola edible oil volumes grew 18% yoy (4QFY18 volumes down 1%) with a change in marketing strategy and higher A&P spends. We expect 8%/7% volume growth for Saffola edible oils in FY20/FY21 and would likely build in mid-single digit volume growth for the brand over long term. Healthy foods portfolio grew 38% yoy led by Saffola masala oats and various product launches under Saffola Fittify and Coco Soul. The healthy foods franchise remains a focus area and MRCO would continue to invest behind brands and expand the category through product innovations in future.
International biz on track, VAHO growth disappoints again:
VAHO volumes were up only 1% yoy due to underperformance of premium brands and clearing of channel inventory prior to ~5% price cuts. We believe VAHO will continue to be driven by mass products like Amla and Sarson while some other brands would recover off a favorable base. International business 4Q sales stood at Rs 3.7bn, up 14% yoy (CC growth: 7%). South East Asia business continued to recover, growing 13% yoy in CC terms. Bangladesh business was up 12% in CC terms led by the non-coconut oil portfolio (+24% yoy in 4Q). MRCO is aggressively focusing on the non-coconut portfolio in Bangladesh and also entering the baby care segment. Key risks: Lower-than-expected volume growth, higher raw material costs.
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