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Buy Marico Ltd For Target Rs.490

Margins pressure to continue in near term…

Marico posted strong 25% volume growth with healthy growth in Parachute & VAHO on the back of a low base quarter. Saffola and foods business also continued the growth momentum. Revenue witnessed growth of 34.5% to | 2012 crore led by 25% volume growth in India business and 23% growth in international business (constant currency). Parachute saw growth of 38% led by 29% volume growth. Similarly, Saffola & VAHO witnessed growth of 43% & 22%, respectively. Volume growth in Saffola & VAHO was 17% & 22%, respectively.

The foods business grew 134% in Q4. With ~25% increase in copra prices & 39% increase in rice bran oil prices, gross margins contracted 513 bps during the quarter. Employee spends & marketing spends inched up 30 bps & 20 bps, respectively. However, the company was able to save 260 bps through various cost cutting measures. Operating profit increased 13.1% to | 319 crore while operating profit margins contracted 300 bps to 15.9% during the quarter. Led by strong growth in operating profit, net profit witnessed growth of 12.9% to | 227 crore.

Saffola, foods continuing growth momentum

Saffola witnessed a robust volume growth of 17% in FY21 with increasing penetration & consumer preference for healthy cooking. Similarly, foods category has touched a | 300 crore sales in FY21 on the back of high growth in Oats & foray in new category (Honey, Chyawanprash & Soya Chunks) in health space. The company also launched ‘Saffola Oodles’ in healthier noodles space during the quarter.

Moreover, it has expanded its Soya Chunk distribution to MP (the product was launched only in WB earlier). The management expects the food business to grow to ~|800-850 crore by FY24E. We believe edible oil & foods categories have gained the growth momentum with the change in consumer preferences for healthier foods. These two categories would drive the growth for the company.

High commodity cost to pressurise margins in near term

The quarter has seen a very sharp increase in prices across commodities. Apart from copra & rice bran, liquid paraffin & HDPE prices have also risen by 29% & 31%, respectively, in Q4. However, copra prices have corrected by 15% in April from peak. Rice bran prices are also expected to cool down from June-July onwards.

The company also took a price increase in Parachute to the tune of 9% in H2FY21E. Similarly, price increase in Saffola has been to the tune of 45-50% in January-April 2021. We expect operating margins to remain under pressure and estimate 19.1% & 19.2% operating margins for FY22E & FY23E, respectively (60-70 bps lower than FY21).

Valuation & Outlook

We believe tailwind of healthier food consumption is expected to grow the foods & Saffola business in the next two to three years. Moreover, hair oils categories are also expected to witness strong growth with a mix of volumes and price hikes. It is also clear that Marico is looking to gain volumes and market share by not tinkering with prices too frequently. We maintain our BUY recommendation and target price of | 490/share.

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