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Marico’s Jun-Q report was on expected lines as weaker topline was offset by a much higher gross margin. The former was due in part to channel-related adjustments, and price-cuts, which were especially sharp in Saffola. Management cited better secondary sales that reflect a stronger growth picture than what primary numbers suggest. GPM progression was way better than we envisaged; Marico has now upped margin guidance by 50bps and expects GPM to expand 250-300bps, EBITDA expansion of >150bps in FY24. Emerging businesses are growing well and Marico has just made a strategic investment in ‘Plix’, a plant-based nutraceuticals brand. Bet-size in Digital M&A has increased (INR3.7bn for 58% stake; ARR of INR1.5bn) – signifies confidence on one hand but also warrants more careful monitoring, in our view, given low success rates in larger M&As in general. We expect Marico’s earnings to remain strong but recent run-up suggests that a lot has likely been priced-in already.

* Operationally inline quarter: Marico’s revenue was down 3.2% to INR24.8bn, but EBITDA and adjusted profit grew well by 8.7% and 12.2% to INR5.7bn and INR4.2bn. Revenue was tad below what we expected - Saffola oil’s >30% price-unwinding was steeper than we envisaged. Domestic volumes grew 3% with some impact from channel inventory adjustments in the core categories; growth in secondary offtakes was better - a couple of ppts higher than 3%. The company has further corrected the historical 1Q revenue skew which led to lower primary sales during the quarter; plus, there was also some destocking by the trade in Saffola oils given sharp deflation in input-costs. Operating profit was inline as the impact of lower topline was offset by a much sharper than expected expansion in gross margin and, therefore, in operating margin (+253bps). Higher other income (+88%) and lower tax rate drove a better growth in bottomline vs EBITDA.

* One-off channel inventory corrections impacted reported volumes across core segments: 1) Saffola edible-oils’ volumes grew in low double-digit with some adverse impact of destocking by trade owing to price-deflation in the segment. Price-correction was sharp (>30%) which led to value-sales decline of >20%. 2) Parachute rigids was muted too with volumes down 2% on a soft base. Primary sales were impacted by the last phase of trade scheme rationalization to correct quarterly skew, which along with price-cuts taken in the brand led to a 5% decline in revenue. 3) VAHO sales were flat – some element of channel adjustments here as well, plus slower recovery in mass-end consumption. Competitive activity at mass-end appears to have picked up again. 4) Newer businesses continued to do well. Foods grew 24% and Digital-First brands are on track to achieve an FY24-exit run-rate of INR 4bn. Management cites scale-and-profitability improvement of this cohort to be a key priority. 5) International did well and grew 9% CC despite macro and currency headwinds in some of the geos.

* Margin expansion played out well: GPM surprised positively again at 50% (+494bps yoy, +257bps qoq) vs JMFe 48.9%. Further moderation in the costs of key inputs continued to drive gross margin higher. A&P spends grew just 6.5% during Jun-Q (standalone A&P +9.2%) but management is expecting growth for full year to be in double-digit. EBITDA margin expanded 253bps to 23.2% vs JMFe 22.9% with the lower flowthrough being on account of scale de-leverage given lower topline vs LY. FY24 margin guidance has been upped (>150bps operating margin expansion) as stated earlier.

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