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Result in line; material cost outlook benign

MRCO’s 4QFY22 result was in line our estimates.

With: a) key raw material, Copra, likely to be stable in FY23E; b) likelihood of 5-7% domestic volume growth in FY23E; c) continued healthy outlook on its international business sales and margins; and d) inexpensive valuation of 39x FY24E, we remain positive on MRCO from a one-year perspective amid an uncertain outlook for peers, especially given its high-teens earnings growth potential in FY23E, which is much higher than peers. Maintain BUY

Performance in line with our estimates

Consolidated net sales grew 7.4% YoY to INR21.6b (in line) in 4QFY22. The domestic business grew 5% YoY. Consolidated EBITDA/PBT rose 8.5%/6.2% YoY to INR3.5b/INR3.2b (in line), respectively. Adj. PAT rose 5.5% YoY to INR2.5b.

The consolidated gross margin expanded 35bp YoY to 44.5%. As a percentage of sales, lower staff costs (-100bp to 6.4%), higher other expenditure (+40bp to 12.6%) and higher A&P expenses (+80bp to 9.4%) led to marginally higher EBITDA margin at 16% YoY in 4QFY22.

Business segments: Sales for VAHO/Saffola grew 3%/17% YoY in 4QFY22. Parachute volumes were marginally lower YoY.

Highlights from the management commentary

International business reported double-digit growth in constant currency (CC) for the fifth consecutive quarter. Management expects healthy growth to continue in international business going forward as well.

Medium-term domestic volume growth targets are 5-7% and management believes that FY23E should have equivalent volume growth despite immediate volume growth pressures in the overall FMCG space.

Management will continue to target INR8.5-10.0b sales in Foods in the next two years. FY22 Food sales were INR4.5-5.0b, which was in line with the stated targets. MRCO’s Oats portfolio is doing well along with its Honey and Soya Chunks portfolios. More efforts are needed on Chyawanprash though.

Among digital first brands, Beardo’s FY22 exit rate is tracking an INR1b run rate on an annualized basis. Total digital first brands are tracking an INR1.8- 2b run rate on an annualized basis and the management maintains its target of INR 4.5-5b in sales by FY24E.

Margins are likely to be subdued in the near term and improve in 2HFY23E. Management expects Copra prices to be soft for a large part of FY23 as harvest season has been pretty good so far.

Valuation and view

There is no material change to our FY23E/FY24E EPS.

Earnings growth prospects are healthy at ~18% CAGR over FY22–24E and ROEs are healthy at ~40% levels.

The much-needed diversification is picking up momentum in Foods and Digital first brands. If sustained, this could lead to higher multiples for MRCO compared to the past. For now, its earnings growth provides a safe haven in an uncertain environment for Staples peers. We maintain our target multiple of 45x FY24E EPS to arrive at our TP of INR600. We reiterate our BUY rating on the stock.

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