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Improved quarter performance led by market share gains; maintain ADD

Our view

Q1 performance was quite encouraging on the growth fronts led by 10.3% volume growth and sequential market share gains in key brands GluconD, Nycil and Everyuth. Complan and Sugar Free continue to struggle since last few quarters due to category decline and less aggression in distribution expansion. Timely price hikes in Q4 also aided gross margin contraction to only 110bps. Few positives were strong double digit growth in Glucon D, Nycil and Everyuth with improved market share. Sales reorganization should drive better sales for Nutralite while strong summer should drove growth in Nycil and Glucon D. New launches across the portfolio with NPD of several launches in coming quarters and increased focus in MT and e com channel create decent growth visibility. We see a long growth headroom for the company given strong brand equity and leadership position in most segments, less than 20% penetration across its categories, multiple brand extension opportunities especially in health and wellness, strong R&D capabilities of the parent company and best in class brand spends, all of which can help the company grow above industry growth rates over the longer term. Margins should start improving post 1H as headwinds persist due to uncertainty around inflation. Category decline and competitive intensity together with less focus in Complan led to growth headwinds and market share loss. We maintain an ADD rating given structural positives and long term potential for its key power brands are intact.

Result Highlights

Topline – Revenue/EBITDA/PAT growth of 16.6%/5.5%/7%, 3 yr revenue CAGR of 3.9%. Revenue growth came in above estimate on a base of 11.2% growth at Rs 6.9bn with volume growth at 10.3%, key positives were double digit growth in Glucon D, Nycil, Nutralite and Everyuth.

Margins – Gross margin lower by 110bps YoY to 54.3% impacted by inflation in RPO, Aspartame and milk prices, EBITDA margin dipped 220bps to 21.3% as management increased A&P spends by 39% YoY, other expenses also increased 13.3% YoY.

Valuation

Q1FY23 posted positive performance in growth fronts while margins continue to remain below 20% in FY23, we maintain our estimates and build in revenue/EBITDA/PAT CAGR of 11%/18%/5% over FY22 24E and maintain ADD with a TP of Rs 1,858 based on 35x FY24E earnings (in line with average). We now expect a re rating only once we see sustainable double digit volume growth and margin expansion backed by successful innovation and distribution expansion.

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