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* Marico’s (MRCO) 1QFY24 sales came in below our estimate owing to pricing interventions in key domestic portfolios last year and further price cuts in Saffola Oils during the quarter. The beat on profitability was led by higher other income, which included a one-time gain of INR140m from a land sale.

* The rural recovery has been slower than expected, but factors like moderating inflation, favorable monsoons, and government spending make the management cautiously optimistic about a gradual recovery in volume growth in the coming quarters.

* The management expects positive revenue growth in H2, with gross margin expansion. It expects operating margin to rise above 20% in FY24, driven by cost management and brand-building investments, which should improve MRCO’s earnings growth prospects. Valuations are inexpensive at 50x/43x FY24E/FY25E EPS. We reiterate our BUY rating on the stock.

Sales and volumes disappoint; higher other income drives PAT beat

Consolidated

* Consolidated net sales declined 3.2% YoY to INR24.8b (est. INR28.0b).

* EBITDA/PBT/Adj. PAT grew 8.7%/13.6%/15.1% YoY to INR5.7b/INR5.8b/ INR4.3b (est. INR5.4b/INR5.1b/INR3.8b).

* Domestic volumes increased by 3% YoY (est. +7%).

* Consolidated gross margin expanded by 500bp YoY/260bp QoQ to 50.0% (est. 47.5%).

* As a percentage of sales, higher staff (up 120bp to 7.3%), A&P expenses (Up 320bp to 10.9%) and other expenditure (down 200bp to 8.6%) led to EBITDA margin expansion of 250bp YoY to 23.2% in 1QFY24 (est. 19.3%).

Standalone

* Sales declined by 3.2% YoY to INR18.4b. EBITDA grew 5.5% YoY to INR4.0b, while Adj. PAT declined 20.7% YoY to INR3.1b.

* EBITDA margin expanded 260bp YoY to 21.9%.

Highlights from the management commentary

* Gross margin expansion was led by moderation in input prices and favorable product mix. MRCO also passed on price declines to consumers.

* In FY24, gross margin is expected to rise by ~200-250bp and EBITDA margin to increase by ~100-150bp YoY, targeting ~+20% EBITDA margin.

* The company aspires to clock ~10% contribution of domestic revenue from digital-first brands in FY24.

* The slowdown in rural personal care demand has impacted the VOHO category. The company is now focusing on its mid and premium segment portfolio to offset the effects of the slowdown.

* MT and e-commerce grew in double digits, while GT saw a mid-single digit drop

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