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4QFY22 update: Consolidated sales above expectations; marginal profit growth led by higher A&P spends

Highlights from MRCO’s 4QFY22 pre-quarterly update

Macro view: FMCG volumes decline during Jan-Feb’22 period

* Consumption trends in 4QFY22 remained subdued due to weak rural sentiment and further inflation in global commodities led by the ongoing geopolitical crisis.

* Sustained inflation trajectory continued to hurt consumer spends across rural and urban sections as companies across FMCG categories took price hikes to mitigate the high material cost inflation.

* According to Nielsen, FMCG volumes dipped YoY during Jan-Feb’22 period.

4QFY22 performance: Consolidated revenue grows in high-single digit

* Consolidated revenue growth was in high-single digit during the quarter.

* India: Revenue growth was in low-single digit during the quarter, while volumes were marginally higher on a high base (25%). Volume growth was in double-digits on a two-year basis.

* MRCO’s India business gained market share during 4QFY22.

International business: Double-digit growth on constant currency basis

* In 4QFY22, MRCO’s international business delivered constant-currency growth in double-digits despite a strong base (23%), with all markets faring positively.

* For FY22, the international business delivered a constant-currency growth in the mid-teens.

Costs and margins: A&P spends rise; gross margin to remain flat YoY

* We expect gross margin to improve sequentially, but remain flat YoY.

* A&P spends were higher YoY; we expect 4QFY22 EBITDA margin at 15.8%.

* Copra prices remained benign during the quarter while edible oil and crude oil prices witnessed a sharp increase due to the geopolitical conflict.

* MRCO took price hikes in the value added air oils (VAHO) and Saffola edible oil portfolios during the quarter.

Segments

* Parachute Coconut Oil volumes were marginally lower YoY, on a high base of 29%.

* VAHO grew in low-single digits in value terms.

* The Saffola franchise grew in high teens in value terms, with healthy growth in Foods.

* Premium Personal Care posted broad-based, double-digit growth.

* Digital-first brands, Beardo and Just Herbs, performed in line with expectations.

Valuations appear inexpensive given strong earnings potential and healthy ROE

* After achieving only a ~6% sales CAGR over FY15–20, MRCO's sales momentum is better now than in the past, with a double-digit sales CAGR expected over FY20–23. This is likely to sustain beyond FY23 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 48.5x/41.3x 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 INR630.

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