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1QFY22 update: Strong performance across the portfolio; stable input costs a positive

Highlights from MRCO’s pre-quarterly update for 1QFY22

Macro view

* The first three weeks of Apr’21 saw a continuation of the healthy demand momentum from Mar’21. The same was disrupted due to the second COVID wave that affected the country.

* While public health was impacted more severely this time around, as the pandemic advanced into rural areas, the impact on the business was lesser than the last year’s first wave. This was because supply chains were equipped to cope with localized and staggered lockdowns, while retail stores were allowed to operate for a limited number of hours daily.

* Demand in South and West India, which are relatively higher salience regions for MRCO, was particularly slower due to heavier caseloads and extended lockdown restrictions.

* The company has seen improving demand trends since early Jun’21 as positivity rates fell and due to steady progress on the nationwide vaccination drive.

Domestic business

MRCO’s India business delivered over 30% revenue growth, backed by strong double-digit volume growth in 1QFY22, albeit on a lower base.

* Parachute delivered ahead of medium term expectations.

* Saffola edible oils posted lower double-digit volume growth, despite a high base.

* The Value Added Hair Oils (VAHO) franchise witnessed a recovery, albeit on a low base, due to billing constraints during most of Apr’20.

* Revenue in the Foods business more than doubled YoY, with the Oats franchise continuing its strong momentum and recent launches scaling up well, in line with its medium term expectations.

* The Premium Personal Care portfolio recovered sharply over last year, but ended below pre-COVID levels.

International business

* It posted constant currency growth in the low 20s.

* Bangladesh sustained its growth momentum, while a broad based recovery was witnessed across other markets.

Costs and margin

* As key input costs eased after peaking at the start of 1QFY22, gross and operating margins are expected to deliver a significant improvement QoQ.

* Operating margin is expected to fall sharply on a YoY basis, given the exceptionally high base caused by rationalization of A&P spends and other overheads, as well as the effect of significant pricing-led growth in the base quarter.

* The management expects muted profit growth in 1QFY22.

Outlook

* While there are apprehensions of a third COVID wave, the management is adequately prepared to tackle any disruptions in the business environment resulting from the same.

* It maintains its aspiration of delivering sustainable and profitable volume-led growth over the medium term, led by strengthening brand equity in its core franchises and progressively scaling up new engines of growth.

Valuation and view

MRCO’s resilient product portfolio has delivered an impressive performance across categories, with the domestic business registering strong double-digit volume growth, even as most of 1QFY22 was disrupted by COVID-led lockdowns. Growth in Parachute is highly encouraging. The Foods and Edible Oils portfolio is likely to continue its growth momentum, with a higher consumer focus on health, hygiene, and immunity boosting products. Riding this tailwind, it is launching new products in these categories, the success of which will be critical for medium-term growth (though it has seen limited success so far). Continued rebound in VAHO is a positive, and further commentary needs to be watched out for. Outlook on its international business is getting better. Material costs are beginning to stabilize post the sharp inflation seen at the beginning of 1QFY22. This will help bolster gross margin. At 45.8x FY23E EPS, the stock trades at a premium to historical valuations, but better earnings visibility v/s peers over FY22 will result in sustained premium multiples. We maintain our Buy rating and TP of INR610/share.

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