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Strong demand momentum to continue, margin headwinds transient

Result Highlights

* Quarter summary – Revenue growth of 34.5% yoy with 25% domestic volume growth, rural grew 1.8x of urban, 25% growth and 23% CC growth in international business, gross margin decline of 520bpss to 44.1%, EBITDA margin decline of 300bp to 15.9%, PAT growth of 16.7%.

* Growth by verticals – 29% volume and 38% value growth in Parachute on base of 8% and 12% decline, 22% volume and value growth in VAHO on base of 11% and 18% decline and 17% volume and 43% value growth in Saffola on base of 25% volume and value growth.

* Commodity inflation impact – Gross margins down by a sharp 520bps due to 25% inflation in copra prices, 39% in rice bran oil, 29% in LLP and 31% in HDPE.

* Market share trends – Coconut oil market share down 100bps yoy to 61%, Saffola share up 500bps to 81% and VAHO market share up 200bps to 37%. 

Valuation and view –

4Q was a strong testament of the pricing power of MRCO’s brands with strong broad‐based growth momentum despite significant price hikes in Parachute and Saffola. Foods business more than doubled while VAHO saw strong market share gains led by amla. Margins were impacted as the company absorbed some commodity inflation which it believes is transient.

While growth momentum should sustain with higher pricing contribution in FY22 led by aggressive expansion in rural stockiest network and eCom/MT channels, margins seem to have bottomed out in 4Q and should see a gradual recovery with copra prices already correcting 15% from peak and edible oils expected to cool off from 2Q onwards although crude remains one of the key risks. Foods business is expected to continue growing at 30% CAGR with continued new and innovative launches. The international business also seems to be on a strong wicket.  

MRCO looks well placed to deliver on its medium‐term aspiration of 13‐15% growth with 19‐20% margins given multiple levers like share gain possibilities in Parachute portfolio, strong momentum for Saffola edible oils and foods portfolio, recovery in international markets and continued strengthening of distribution and digital infrastructure. We model in revenue/EBITDA/PAT CAGR of 15%/16%/17% over FY21‐23E and assume coverage with a BUY rating with a PT of Rs 491 based on 40x FY23E earnings, in‐line with its 5‐yr average multiple.

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