Improving growth outlook in international, Saffola and Parachute, margin headwinds temporary; stock at 33x poised for a re‐rating

* Quarter highlights‐ 9% revenue growth, 11% domestic volume growth, 7% growth in international business, margins up 30bps despite 160bps GM decline due to cost saving initiatives and lower A&P Spends driving PAT growth of 15%, 95% portfolio back to positive growth, rural growth higher than urban, E‐commerce strong while MT and CSD remain subdued, strong volume growth trends with Parachute (10%), VAHO (4%), Saffola (20%) and foods saw 55% value growth, multiple launches in immunity segment, hygiene portfolio contribution at 1.5% now cooling off, international growth led by 16% growth in Bangladesh.

* Outlook – Confident of delivering 8‐10% volume growth for 2HFY21, medium‐ term volume growth target of 5‐7% in Parachute, VAHO growth to pick up in 2H from 4% in in 2Q, corrective measures in Saffola should help sustain high single‐ digit volume growth, foods to reach 450‐500cr revenue in FY22, near‐term muted outlook for premium personal care but medium term target of double‐digit growth remains. Overall medium term target of 8‐10% volume growth and 13‐15% revenue growth, target 150cr cost savings in FY21, margins to be above 20% for FY21 and above 19% in medium term.

* Gross margin outlook – Increase in input costs (especially copra up 10%) not passed on to drive share gains given expectation of some downtrading; expect input costs to start softening from January; cost measures till then will offset the impact.

* Saffola – 62% of growth attributed to increased penetration on account of new users and increased retention which should help sustain strong growth going forward; market share moving up given higher promotions, strong brand equity and reasonable pricing.

* Coconut oil vs Value added hair oils – Parachute witnessing much better trends given lower rural share and gains from unbranded, VAHO dynamics different, premium part is impacted more by COVID restrictions and competition is more intense.

* Channel inventory – Currently at lowest level of distributor inventory in last 3‐4 years to help enhance distributor ROIs; reduced number of SKUs and improved fill rates.

* Saffola brand equity in organic and immunity portfolio – Leveraging strong equity in health segment, Saffola will remain master brand for honey and oats, will create new sub‐brand for ayurvedic products.

* E‐commerce channel outlook – Has reached 8% given acceleration due to COVID; digital adoption from consumer is rapidly increasing both for selecting and buying; will launch a few more digital‐only brands like Beardo; GT channel also undergoing transformation.

* International business – Doing really well in Bangladesh led by aggressive portfolio diversification; will try and replicate the same model now in Vietnam which should start showing results in 4Q; both high‐growth markets.

* Marketing spends – 1Q was all about availability where spends were held back; took conscious decision to increase promotions and A&P spends in 2Q.  

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