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Margin improvement continues amidst easing of copra prices
* Marico’s Q2FY20 revenue was lower than our estimate, but EBITDA was in line. India volume growth was 1%, on a base of 6% growth.
* The company continues to gain traction in modern trade and ecommerce. However, general trade (GT) in urban markets continued to post decline during Q2FY20 due to constrained liquidity.
* Volume growth in Parachute declined 1% amidst liquidity constraints and floods in Maharashtra and South. VAHO was flat as rural markets of North and East were most affected by slowdown. Saffola grew merely 1%, given its price premium and sluggishness in GT.
* GM improved significantly (+560bps), from Q2FY19- highest GM expansion after 13 quarters, primarily due to a decline in copra prices. Management does not indicate significant inflation in copra prices over next six months which will help sustain margin performance.
* We also believe that Saffola and VAHO volumes would recover, due to a favorable base, and the Parachute brand will continue its strong growth with price revisions.
* We have downward revised our FY20E and FY21E EPS estimates at ` 8.8 and ` 9.7 respectively. Valuing the stock at 42x FY21E EPS to arrive at a TP of `405. Maintain Accumulate.
Profitability in line with estimate
Revenues declined 0.4% YoY to ` 18.3bn. Domestic business reported 3% revenue de-growth whereas IB posted +8% growth. EBITDA increased 15.8% YoY to ` 3.5bn. EBITDA margin expanded by 270bps to 19.3% driven by 560bps expansion in GM. However, the expansion in GM was partially offset by 120/70/100bps increase in A&P spends/employee /other costs respectively. RPAT increased 17.1% to ` 2.5bn.
Muted segmental performance
Marico reported 1% volume growth. Key brands grew as follows in Q2FY20:
* Parachute degrew by 4%/ 1% in value/ volume terms
* Value added hair oils degrew by 6% in value, flat volumes
* Saffola posted +5% /+1% growth in value /volume respectively
International Business posted 9% sales growth on constant currency led by robust growth of +15% in Bangladesh.
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