Published on 11/01/2020 9:44:21 AM | Source: Motilal Oswal Services Ltd

Neutral Marico Ltd For Target Rs.358 - Motilal Oswal

Posted in Broking Firm Views - Long Term Report| #FMCG #Broking Firm Views Report #Marico Ltd #Motilal Oswal #Quarterly Result

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Growth continues moderating in 3QFY20

Low input costs to drive EBITDA growth

Key verbatim from Marico’s (MRCO) pre-quarterly update for 3QFY20.

* Macro view: Management commented that “Overall consumption trends during the quarter belied expectations of the beginning of a revival in sentiment which were built on the back of good monsoons and announcement of various government measures. Category growths across personal care remained under pressure, while foods and allied categories fared relatively better. However, the Company continued to consolidate market shares across key franchises. The traditional channel stayed weak, as channel partners continued to face liquidity challenges amidst a soft demand environment. Growth in Modern Trade and E-Commerce also slowed down, partly due to specific price management measures taken in these channels to counter inter-channel conflict.”

* Comment on macro outlook: “The Company expects some green shoots of recovery in Q4, on the back of focused marketing initiatives and pricing interventions taken in key portfolios, which have hit the shelves in the late stages of Q3 post clearing of older inventory in the channel.”

* Domestic business: “In the India business, the Saffola Oils and Foods portfolio delivered healthy double-digit volume growth. However, due to a decline in Coconut Oil, Hair Oils and other portfolios, the India business as a whole posted a marginal decline in volume growth.”

* International business on track: “The International business posted high single-digit constant currency growth with the Bangladesh business holding firm, while other geographies lacked fervor.”

* Margin improvement likely to continue: “EBITDA margins are expected to improve year-on-year given benign input costs, which should translate to reasonable growth in the bottom line.”

* Company outlook: “The company will continue to drive sustained profitable volume-led growth over the medium term, through its focus on strengthening the franchise in the core categories and driving the new engines of growth towards gaining critical mass.”

* Valuation/view: Three factors that underpinned our investment case on MRCO were:

(i) better volume visibility compared to peers,

(ii) a strong pipeline of new products, which could potentially alter pace of medium-term growth and

(iii) a decline in copra cost leading to a sharp pick-up in earnings.

However, as there has been sharp sequential deterioration in demand in 2Q/3QFY20, volume visibility is also not superior to peers and the best of copra cost reduction is behind. Valuations are fair at 41.9x FY21E EPS. We thus maintain our Neutral rating on the stock.


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