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Volume momentum, price increases to sustain sales growth

* Marico (MRCO)’s reported EBITDA and PBT were in line with our estimates, although sales surprised, diverging from our forecasts. However, margins disappointed, weighed by material cost pressures.

* MRCO is likely to report higher sales growth in FY22E v/s our earlier estimates, despite the impact of some temporary supply chain disruptions, owing to a) 90% of its portfolio being non-discretionary, b) healthy volume growth sustaining despite steep price increases (particularly in Saffola) – in response to higher commodity costs, and c) higher realizations. The Food business (~4% of sales in FY21; up 135% YoY) is expected to add 100– 120bps of delta to sales annually.

* Copra costs, which adversely affected 4QFY21, have corrected 13–15% in Apr’21 from the 4QFY21 peak; the management is confident of gradual sequential margin improvement. It targets operating margins near 19% levels in FY22E, which is still 80bp lower YoY.

* Valuations of 42.1x/36.3x FY22/FY23E are inexpensive. The stock would rerate further if the company can elevate its EPS CAGR to 15–20% over the next few years. Maintain BUY.

Sales beat; margins weaker than expected

* MRCO’s 4QFY21 consolidated net sales grew 34.5% YoY to INR20.1b (est. INR17.9b). The domestic business grew 35% YoY. Consolidated EBITDA grew 13.1% YoY to INR3.2b (in-line). PBT grew 14.8% YoY to INR3b (in-line). Adjusted PAT grew 16.1% YoY to INR2.4b (est. INR2.2b).

* Consolidated gross margins contracted 520bp YoY to 44.1% (est. 46%). As a percentage of sales, A&P expenses remained the same at 8.6% (absolute A&P spends up 35.2% YoY). Other expenses also declined 250bp YoY to 12.2%. Staff cost marginally increased 20bp YoY to 7.5%. The EBITDA margin contracted 300bp YoY to 15.9%.

* Standalone business: Sales grew 35% YoY. EBITDA/adj. PAT grew 6.8%/21% YoY. The EBITDA margin contracted 380bp YoY to 14.6%. The domestic business reported volume growth of 25% (est. 15.4%).

* FY21 sales / EBITDA / adj. PAT grew 10%/8.3%/10.4% YoY.

Highlights from management commentary

* Even with the positive demand outlook, some supply chain related disruptions have been seen even on essential commodities in some states over the last 8–10 days.

* The good seasonal arrival of copra has resulted in a 13–15% reduction in Apr’21 from 4QFY21 peak prices, and the management expects a flat-tomarginal increase in copra costs in FY22 YoY.

* With gradual sequential recovery in margins over the trough seen in 4QFY21 levels, the management aims to achieve a ~19% EBITDA margin for FY22 v/s 19.8% in FY21.

* It targets INR8.5–10b sales from Foods by FY24 from over INR3b currently (up 135% YoY in FY21).

* The tax rate in FY22 would be in the 22–23% and 22–24% range for the next 3–4 years (below our earlier expectations).

Valuation and view

* There is no material change to our FY22E and FY23E EPS as margin pressures and some COVID-19 related disruption are offset by a) ongoing healthy volume growth, b) price increases, and c) lower-than-expected tax rates in these years vis-à-vis earlier forecasts.

* Ongoing volume growth momentum in each of its core segments and significantly high growth as well as targets in the Foods portfolio are encouraging for a business that had only a ~6% sales CAGR over FY15–20 – before reporting double-digit growth in FY21.

* The jury is still out on the success of the new product development – which, along with the ongoing traction in Foods, would elevate both MRCO’s mediumto-longer term earnings trajectory and valuation multiples. Nevertheless, at 42.1x/36.3x FY22/FY23E EPS the stock appears to still provide a healthy upside potential over the next year – with a superior outlook v/s most peers and a far less volatile international business. We target 43x FY23E EPS (in line with the three-year average), which gives us TP of INR490/share, implying a 19% upside. Maintain Buy.

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