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Revenue decline and unfavorable mix to impact EBITDA
Marico (MRCO) has released its pre-quarterly update for 4QFY20. Key highlights from the release:
* Macro view: In view of the nation-wide lockdown, all offices across India have been shut down and all employees are working from home using remote access, virtual private network and enterprise communication platforms. In line with the directives from Government authorities, production at units that manufacture essential food and grocery products continues at a much reduced scale, while deploying the highest safety standards. Production is currently suspended at the company’s other manufacturing units and shall commence as and when Government approvals to that effect are received. The distribution network has also been significantly impacted due to lack of manpower at each point. MRCO is focusing on movement of essential food and grocery items to consumers subject to necessary approvals from local Government authorities. The company is striving to ensure uninterrupted supplies of essential products to customers across channels within the existing constraints.
* Domestic business: In the India business, early signs of improvement across categories seen until early-Mar’20 were more than offset by disruptions in the last 12 days due to lockdowns in some states, which culminated into the first-ever national lockdown to contain the outbreak of COVID-19. During the impacted period, the company managed to register sales largely in the Edible Oils and Foods portfolio. The continued healthy growth in the Saffola portfolio was further topped up by households stocking up food and essential items in the early stages of the outbreak. Overall, the India business posted a low single-digit volume decline in the quarter, with skewed high growth in the Saffola portfolio. However, overall secondary growth in the quarter was in low singledigits, as the primary movement of goods was relatively more impacted during the lockdown period. Value growth for the business continued to trail volume growth. Traditional trade, which was already reeling under liquidity constraints, was further weakened. However, Modern Trade and E-Commerce still managed to stay on the growth path.
* International business impacted: With COVID-19 being declared a pandemic, MRCO’s international businesses were also affected. With many of the territories experiencing partial/complete lockdown in Mar’20, international business recorded mid-single-digit decline on constant currency basis.
* Margin likely to be impacted: Revenue decline (both in India/International) coupled with an unfavorable mix in the India business, should translate into modest EBITDA decline this quarter v/s the corresponding quarter last year. 200 260 320 380 440 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Marico Sensex - Rebased 9 April 2020 Update | Sector: Consumer Marico 9 April 2020 9
* Company outlook: MRCO has started an aggressive cost management exercise to mitigate the impact of reduced sales. It will continue to drive sustained profitable volume-led growth over the medium term, through its focus on strengthening the franchise in its core categories and driving the new growth engines toward gaining critical mass.
* Valuation and view: Two factors underpinning our investment case on MRCO are (1) FY21/ FY22E valuations of 37.1x FY21 EPS and 32.4x FY22E lower than 3- year/5-year/10-year average of 44.8x/42.9x/35.4x, and (2) benign raw material costs YoY. Our forecasts are conservative as we have assumed copra price inflation in 2HFY21E; due to this, EBITDA margin would be lower in FY21E. If copra inflation does not come through, upside risk to our forecasts is significant. Given the uncertain environment, we are attributing a target multiple of 35x, close to its 10-year average.
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