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Domestic volumes grew in low single-digits

Macro view: Rural India remains a drag

* Demand sentiments were similar to 1QFY23, with signs of positivity seen in Sep’22.

* Downtrading in the rural India was prevalent due to retail inflation, while the healthy momentum in Urban and Premium Discretionary continued.

* The management expects consumption to be better in 2HFY23 on account of a reasonably healthy rainfall, moderation in commodity costs, and cooling off of retail inflation.

* Higher crop realization and a festive season should boost demand.

2QFY23 performance: Consolidated revenue grows in low-single digits

* Consolidated revenue growth has been marginally higher (low single-digit) YoY in 2QFY23.

* India: Volume growth in the India business stood at low single-digits YoY (three year CAGR at high single-digits).

International business: Double-digit constant currency growth

* MRCO’s international business has delivered double-digit constantcurrency growth in 2QFY23.

* All markets have continued to exhibit strength and contributed positively.

Operating margin may remain flat YoY

* Copra prices continued its southward journey, with edible and crude oil correcting sequentially.

* The company passed on the benefit of lower input prices to consumers. Due to consumption of relatively higher cost inventory, gross margin is expected to contract sequentially, but expand YoY.

* A&P spends grew in double-digits YoY.

* Operating margin may remain flat YoY.

* The higher effective tax rate will negatively impact its net profit further.

Segments

* Parachute Coconut Oil: Volumes have been marginally lower YoY. It saw improving trends towards the end of 2QFY23. With copra cost sliding further, the management expects consumer pricing to settle in 3QFY23, translating into healthy volume growth.

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

* Saffola Oils recorded high single-digit volume growth on a normal base. It even cut retail prices due to a correction and reduced volatility in oil prices.

* The Foods segment grew in mid-20s, with a broad-based performance across the portfolio.

* The Premium Personal Care segment continued its positive momentum. Its Digital First brands remain on track to meet its internal targets.

Valuations appear inexpensive given the strong earnings potential and healthy RoE

* After achieving a sales CAGR of ~6% over FY15-20, the sales momentum has been better now than that in the past, with double-digit sales CAGR expected over FY20-24. This is likely to sustain beyond FY24 as well, led by: a) the ongoing revenue 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 can lead to higher multiples than that in the past. Valuations at 52x/42.3x FY23E/FY24E EPS appear inexpensive, given the potential of strong earnings growth (v/s earlier) and a healthy RoE in the late 30s. We maintain our Buy rating on the stock with a TP of INR620.

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