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India business witnesses mid-single digit volume decline on high base

Highlights from MRCO’s 1QFY23 pre-quarterly update

Macro view: Sector continues to experience muted demand

* Consumption trends have remained subdued as the rising retail inflation has exerted pressure on the share of wallet for the FMCG sector.

* Consumers have evaluated consumption in non-essential categories and downtraded or moved to smaller packs for essential categories.

* Premium discretionary categories have been better off due to lower base and lower consumption dip in the higher income consumer bracket.

* Weak consumption sentiment has continued in rural India.

1QFY23 performance: Consolidated revenue grows in low-single digit

* Consolidated revenue growth has been marginally higher YoY during the quarter.

* India: Business volume has declined in mid-single digit, however, excluding Saffola Oils volume has increased marginally.

International business: High-teen growth on constant currency basis

* In 1QFY23, MRCO’s international business has delivered constant-currency growth in high double-digits despite a strong base

* All markets have continued to exhibit strength and sustained profitable growth.

Costs and margins: Operating margin likely to expand YoY

* As the company consumed high-cost inventory, gross margin is expected to remain near the same level QoQ and expand on YoY basis.

* A&D spends have grown in low teens YoY. Management expects operating margin to expand and MRCO to post a reasonable operating profit growth on YoY basis.

* Effective tax rate will be 250-300bp higher compared with last year due to expiration of fiscal benefits in one of the manufacturing units.

Segments

* Parachute Coconut Oil volumes have been marginally lower YoY. Due to deflation in Copra prices, it passed on the value benefits to consumers.

* VAHO has grown in low-single digits in value terms.

* Saffola Oils volume has declined in double digits due to high in-house consumption in base quarter and downtrading from premium to mass edible oils in current quarter. The management has decided to put a threshold margin over volume growth.

* Foods segment has experienced a weak quarter due to sharp decline in immunity-led categories such as honey and high in-home consumption of Oats in the base quarter.

* Premium Personal Care has recorded a robust growth across portfolios and the Digital First brands remain on track to meet the internal targets.

Valuations appear inexpensive given strong earnings potential and healthy ROE

* After achieving only ~6% sales CAGR over FY15–20, MRCO's sales momentum is better now than in the past, with double-digit sales CAGR expected over FY20– 24. This is likely to sustain beyond FY24 as well, propelled by: a) the ongoing topline growth momentum in each of MRCO's core segments, b) significantly higher growth rates as well as targets in the Foods portfolio, and c) the INR4.5– 5b targeted from its 'digital first' range of products.

* The much-needed diversification could lead to higher multiples than in the past. Valuations at 43.6x/36.9x FY23E/FY24E EPS appear inexpensive given the potential of strong earnings growth (v/s earlier) and a healthy ROE of over 30%. We maintain our BUY rating on the stock with a TP of INR600.

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