Buy Marico Ltd For Target Rs.390 - HDFC Securities
Onset of Covid-19 has impacted the consumption in India, however, the government has announced various fiscal and monetary measures to mitigate the economic fallout, the positive impact of which, is expected to be seen in the medium-term. Hopes are high for a faster recovery in the rural sector on improvement in agricultural output, on the back of a favourable monsoon forecast, good harvest of Rabi crops, recent APMC reforms, hike in Minimum Support Prices (MSPs) and higher allocation under MNREGA. The pace and sequence of recovery from the crisis will largely depend on the efficacy of public health and fiscal measures, containing the spread of the virus, minimizing risks of reinfection, protecting jobs and incomes and restoring consumer confidence. Given the far-reaching economic impact of the COVID-19 crisis so far, the path to recovery from this setback is expected to be slow and gradual. Consumer staples however can see a faster recovery.
Given the well diversified product portfolio and a strong presence of Marico in some key emerging markets that are growing faster than the domestic market and with new launches lined up, we believe the company has significant growth potential.
Valuations and View:
Marico management has guided on delivering 13-15% revenue growth on the back of 8-10% volume growth in the India business and double-digit constant currency growth in the International business for FY21 while maintaining the operating margin at 19% + over the medium term. Even with a 100-120 bps deviation from this, the company would be outperforming some of its peers growing at sub 5%. Company is investing to improve distribution networks, especially in rural areas through direct reach and leveraging alternative distribution networks like e-commerce.
The stock is currently trading at ~37.2x FY22E EPS and looks fairly valued for the time being. The base case fair value of the stock is Rs.366 (38xFY22E EPS) and the bull case fair value of the stock is Rs.390 (40.5xFY22E EPS) over the next two quarters. We feel that investors can buy the stock on dips to Rs.326-330 band (34.0xFY22E EPS) and add more on dips to Rs.297-301 band (31.0xFY22E EPS).
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