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* Marico’s (MRCO) 4QFY23 sales was in line with our estimates, while the beat on profitability was on account of higher ‘other income’ which included a one-time gain of INR280m from the sale of land. Adjusting for this, profitability was also in line with our estimates.

* Employee expenses were up YoY, due to additional costs related to acquisitions and the base was low due to reversals of some management incentives. The management indicated that both gross and EBITDA margin are expected to improve in the future along with increase in ad-spends.

* The outlook on gross and EBITDA margins is gradually improving. The overall consumption trends are indicating improvement and it is likely that the rural sector has bottomed out as the declining volume trend reversed. This should lead to an improvement in MRCO’s earnings growth prospects. Valuations are inexpensive at 43x/37.5x FY24/FY25 EPS. We reiterate our BUY rating on the stock.

In-line sales; higher ‘other income’ led to PAT beat

Consolidated

* Consolidated net sales remained flat YoY at INR22.4b (est. INR22.3b) in 4QFY23.

* EBITDA/PBT/Adj. PAT grew 13.6%/24.5%/20.8% YoY to INR3.9b/ INR4.0b/ INR3.0b (est. INR4.2b/INR3.8b/INR2.8b).

* Domestic volumes grew 5% YoY (est. up 1% YoY).

* Consolidated gross margin expanded by 290bp YoY/250bp QoQ to 47.4% (est. 46.0%).

* As a percentage of sales, higher staff (up 120bp to 7.6%), other expenditure (up 30bp to 12.9%), and stable A&P expenses at 9.4% led to EBITDA margin expansion of 150bp YoY to 17.5% in 4QFY23 (est. 18.7%).

* FY23 sales remained flat at INR97.6b and EBITDA/Adj. PAT grew 7.7%/6.3% to INR18.1b/INR13.0b.

Standalone

* Sales remained flat YoY at INR17.0b. EBITDA grew 13.0% YoY to INR2.8b while Adj. PAT declined 30.4% YoY to INR2.0b.

* EBITDA margin expanded 170bp YoY to 16.4%.

* FY23 sales/Adj. PAT remained flat at INR74.8b/INR11.8b. EBITDA grew 10.7% to INR13.1b.

Highlights from the management commentary

* Gross margin expanded on the back of moderation in input prices and favorable product mix. They have also passed on the decrease in prices to the consumers.

* In FY24E, while gross margin may increase by ~200-250bp, EBITDA margin is expected to increase by ~100bp YoY.

* The company aspires to clock a revenue of ~INR4b by FY24 from digital-first brands.

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