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Marico reported weak 3Q and commentary for near term was more alarming. Weak consumer offtake, rationalising trade inventory and price cut will continue to dent near term show. Copra tailwinds will soon be behind and EBITDA growth will be challenging in the near term (model 6% EBITDA growth in the next 2 qtrs vs. 17% in the last 4 qtrs). We cut EPS by 4% FY20-22 to factor in growth challenges across portfolio and limited success for new initiatives. We had downgraded Marico in 2QFY20 (@Rs 380) as we thought most near term triggers were priced-in and earnings upcycle will moderate. Despite stock correcting over the last 3- months, we do not see any immediate trigger for upgrade. We value Marico at 35x on Dec-21 EPS, our TP is of Rs 350. Maintain NEUTRAL.
HIGHLIGHTS OF THE QUARTER
* Net revenues declined 2% (est -1%) with domestic business contracting 5% (est -4%) and international grew by 8% (est 8%). PCNO/VAHO/Saffola posted value growth of -5/-17/+13% and volume growth of -2/-7/11%. Urban and Rural GT was down by 7/2% along with moderation in MT (12%) and CSD (5%). Sharper deceleration in performance on account of (1) Weak consumer offtake for hair oil, (2) Rationalising trade inventory to increase RoI for distributors and (3) Consumer offers on PCNO and VAHO. Domestic growth will remain muted for few more quarters.
* International business sustaining healthy growth and reported 8% growth (in line). Bangladesh (46% of Int. Biz) grew by 15%, MENA (15% of Int. Biz) remained weak and posted 4% decline. South East Asia and South Africa clocked 3% growth each. Bangladesh non-coconut portfolio continues to drive international revenue (34/28% growth in 3Q/9MFY20). We model 10% revenue CAGR over FY20-22.
* Copra/Rice Bran oil/LLP/HDPE inflation was at +5/+1/- 17/-30%. As a result, GM was up by 282bps to 49.1% (est 350bps). Employee/ASP/Other expenses was up by - 4/13/-3%. Hence, EBITDA margin was up by 170bps YoY to 20.4% (est 216bps). EBITDA grew by 7% to Rs 3,730mn (est Rs 3,844mn). Dom/Inter EBIT was up by 4.6/7.3% (5.3/79% 3QFY19 and 9.5/24.8% 2QFY20). PAT was up by 10% to Rs 2,720mn (est Rs 2,691mn).
Marico will continue to see challenges in the near term on account of weak revenue growth and limited GM expansion. Weak rural growth, price cuts, reduction in channel inventory will remain inhibitors for growth recovery. Earnings trajectory will continue be soft for few more quarters. Although stock has corrected recently, we do not see near term triggers for re-rating.
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