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Add Marico Ltd For Target Rs.600

Sustained momentum across core brands and new businesses

1Q volumes grew 21% (on an underlying basis) on a good broad-based performance. Market share gains and sustained growth momentum in near-total portfolio is pleasing. While there was significant pressure on gross margins, we like its strategy of prioritising market share / volume growth (still maintaining 19% margin print). Also, we like the distribution expansion plans in both urban (chemist channel) and rural (expanding footprint by another 25%). Healthy foods portfolio continues to trend well and is likely to provide another leg to growth (Rs8.5-10bn in FY24).

Increased focus on (1) D2C brands (targets Rs4.5-5bn by FY24) and (2) driving penetration in the premium personal care segment are other positives. A resilient international portfolio adds to potential outperformance in India. We stay believers – a conducive RM environment will unveil the results of improved execution. Maintain ADD.

* Broad-based revenue growth: Consolidated revenue / EBITDA / recurring PAT grew 31% / 3% / 7%. Domestic revenue grew 35% driven by 21% underlying volume growth; was a correction of the revenue skew from 1Q to 4Q (2-3% impact). This performance was led by strong GT performance with both rural and urban growing at 17% (in volume terms). E-commerce grew by 61% while Modern Trade (+10% YoY) and CSD (+56% YoY).

* Segment performance: Parachute revenue grew 20% with 12% volume growth driven by market share gains as it partially absorbed input cost inflation. Value added hair oils (VAHO) continued its fourth consecutive quarter of volume growth (+34% volume and +35% value) helped by a weak base. Saffola edible oils continued its strong performance (double-digit volume growth for the seventh straight quarter) on a high base, benefitting from increased penetration.

In other categories, oats franchise grew 59% while Premium personal care segment witnessed good recovery – Livon witnessed positive traction while male grooming is still below pre-Covid levels. Saffola Honey is also performing well and Marico targets Rs1bn revenue in FY22. Soya Chunks was expanded outside West Bengal in east and also in some markets of north India.

* International business: Revenue grew 21% in constant currency terms (+20% reported) driven by broad-based performance across geographies - Bangladesh (+9% in CC) and continued performance in South Africa (+52% in CC), South East Asia (+16% in CC), MENA (+74% in CC).

* Margin declined significantly – input cost headwinds across portfolio: Consolidated gross margin contracted 790bps to 41.0% driven by steep inflation across the portfolio (rice bran oil, crude oil derivatives and copra partly) offset by pricing interventions. However, consolidated EBITDA margin declined by 520bps to 19.0% primarily helped by benefit from operating leverage – ad-spends even though were up 28% YoY were down 20bps in terms of % of sales.

Copra prices declined by ~13% QoQ and management expects prices for FY22 to be largely flat to slight inflationary YoY. Edible oil input cost is expected to be volatile in the short term with medium term expectation of a downward bias. It expects to operate above the margin threshold of 19%; operating guidance was 8-10% volume growth in India over the next three quarters and double-digit constant currency growth in the international business.

* Valuation and risks: We increase our earnings estimates by ~3-5%; modelling revenue / EBITDA / PAT CAGR of 15 / 15 / 18 (%) over FY21-23E. Maintain ADD with DCF-based revised target price of Rs600 (earlier Rs560). At our target price, the stock will trade at 48x P/E multiple Mar-23E. Key downside risk is higher-thanexpected inflation in copra prices.

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