Buy Marico Ltd : 2QFY22 update - Expect healthy topline growth driven by improved consumer sentiment By Motilal Oswal
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Buy Marico Ltd For Target Rs.655
2QFY22 update: Expect healthy topline growth driven by improved consumer sentiment
Highlights from MRCO’s pre-quarterly update for 2QFY22
Macro view
* Improving demand trends were witnessed in 2QFY22 as mobility levels increased on the back of reducing COVID-19 infections and accelerated pace of vaccinations.
* Discretionary categories and out-of-home consumption also picked up.
Domestic business
* MRCO’s India business witnessed healthy consumer sentiment across categories, with revenue growth in the low 20s and volume growth close to double-digits on a two-year CAGR basis.
* Parachute Coconut Oil’s performance was in line with its medium term aspirations.
* Value Added Hair Oils posted double-digit volume growth.
* Within the Saffola franchise, Saffola Edible Oils had a muted 2QFY22, due to volatility in Edible Oil prices, which led to trade destocking as well as lower in-home consumption.
* Foods continued to grow well and remains on course to clock INR5b in revenue in FY22.
* Premium Personal Care portfolios grew considerably, albeit on a low base. Digital-first brands – Beardo and Just Herbs – performed in line with expectations.
International business
* The international business posted double-digit constant currency growth.
* MRCO witnessed positive trends in all markets, except Vietnam. A large part of the portfolio here is discretionary in nature and Vietnam witnessed a severe COVID-19 surge and stringent lockdown restrictions.
Cost and margin
* Among key inputs, copra prices corrected further, crude remained firm, while edible oil prices oscillated at higher levels.
* Gross margin is expected to improve marginally on a sequential basis, but will be under pressure on a YoY basis due to higher input costs v/s last year.
* Operating margin is also expected to contract YoY. The management 280 expects modest profit growth in 2QFY22.
New product launches
* After a lukewarm response to Saffola Arogyam Chyawan Amrut, the company altered the product mix and launched Saffola Immuniveda Chyawanprash in 2QFY22, which is available across channels pan-India.
Valuation and view
* a) Ongoing topline growth momentum in each of its core segments, b) significantly higher growth rates as well as targets in the Foods portfolio, and c) INR4.5-5b targeted from its ‘Digital-first’ range of products are highly encouraging developments for a business that had ~6% sales CAGR over FY15- 20, before reporting double-digit growth in FY21.
* The much needed diversification could lead to higher multiples compared to the past. Valuations at 47.1x FY23E EPS appear inexpensive, given the promise of strong earnings growth compared to the past. We target 50x Dec’23E EPS to arrive at our TP of INR655/share, implying a 17% upside. We maintain our Buy rating.
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