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FY23 margin picture not scary unlike peers’

The street’s perception of Marico being one of the very few companies in the sector that would escape the current chaos caused by severe commodity-costs inflation might just play out in FY23, as per our calculations, even though the same did not hold out as far as 2HFY22 was concerned. The two key management expectations of Parachute volumes uplift and overall margin trajectory improving sequentially in Mar’22-Q were foiled by the souring of consumer sentiments in the country and the emergence of geo-political tensions that caused edible-oil prices to further inflate vs their already-elevated levels. The good news for FY23 is that copra appears to be decisively deflationary (vs FY22 average). Management cited it has good-enough visibility to expect a benign trend on that front. Saffola margin (and demand), though, would need some careful manoeuvring, given the severely inflationary edible-oil price table, which also poses some risk of downtrading. VAHO still needs a lot more work to get back to a steady-state level. We continue to like Marico, but recent strong run in the stock leaves lesser room for upside.

* Decent margin performance during Mar-Q: Marico reported 7.4%, 8.5% and 5.5% growth in sales, EBITDA and adjusted net profit to INR 21.6bn, INR 3.5bn and INR 2.5bn respectively. Revenue performance was on the line of what management had earlier indicated, whilst profit performance was 4-5% ahead of what we expected. The business continued to prioritize brand-building investments over near-term margin consideration, and grew A&P by 17.9% yoy during the quarter – this exerted an 84bps pressure on margin during the quarter. But gross margin performance was slightly better and staff costs declined 7.3% yoy, which together helped drove an 8.5% growth in EBITDA during the quarter. The company witnessed severe inflation in the input-costs pertaining to more than half of the portfolio – rice bran, sunflower oil, LLP and HDPE costs inflated another 6-13% qoq (spot basis) while copra prices declined 9% qoq. We believe the benign trend in copra prices should help offset the continued pressure that sunflower-oil, rice bran, LLP and HDPE are likely to exert on the overall gross margin profile in FY23E.

* Volume performance was soft across core categories: Marico’s domestic volumes grew 1% during Mar-Q but likely driven by categories outside the three core ones which were all subdued during the quarter. This translates the three-year CAGR (to smoothen out impact of pandemic-related disruptions) to 7% which, in our view, is still a very commendable growth rate. 1) Saffola Foods grew 17% during the quarter. The Digitalfirst brands are ramping up fast and premium personal care grew in high double-digit. 2) Parachute volumes declined 1% but three-year CAGR remained in-line with medium-term growth aspiration of 5-7%. 3) Saffola edible-oils volumes were flat. The category was impacted by price volatility and weak trade sentiments during the year. 4) Value-added Hair-oils sales grew 3% but volumes likely declined in low single-digit, as per our workings. International business did well and delivered constant currency growth of 12% overall (Bangladesh +16% in CC terms). International margin was higher cf. domestic for the second year running.

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