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In line result; gross margin likely to have troughed

* MRCO’s 1QFY22 result was in line with our expectations. Sales momentum continues to remain healthy. With Copra prices sharply declining from their peak in recent months, coupled with price increases taken, the management said gross margin is likely to revive in 2Q before increasing significantly in 2HFY22.

* It maintained its strong growth guidance for the Foods business, with sales targeted at INR5b by the end of FY22 and INR8.5-10b by FY24. Honey, Noodles, and Soya Chunks are doing very well.

* Allied with sales of INR5b now targeted from e-commerce focused brands by FY24 (target shared for the first time in its 1QFY22 result call), there is a much required diversification of the portfolio, boosting its medium-to-longterm topline growth prospects.

* With sustained healthy topline momentum in its core brands now allied with newer revenue streams, higher P/E multiples compared to the past are justified. We maintain our Buy rating on the stock.

Sales beat; margin weaker than expected

* Consolidated net sales grew 31.2% YoY to INR25.3b (est. INR24.6b) in 1QFY22. The domestic business grew 34.8% YoY. Consolidated EBITDA grew 3% YoY to INR4.8b (in line). PBT grew 5.4% YoY to INR4.7b (in line). Adjusted PAT grew 7.6% YoY to INR3.6b (in line).

* Consolidated gross margin contracted by 760bp YoY to 41% (est. 45.4%). As a percentage of sales, lower staff (-110bp YoY to 5.9%), other expenditure (-110bp YoY to 9.15), and A&P expenses (-20bp YoY to 6.9%) meant EBITDA margin contracted by 520bp to 19% in 1QFY22.

* Business Segments: Sales for Parachute/VAHO/Saffola grew 20%/35%/60% YoY in 1QFY22 on the back of 12%/34%/24% growth in volumes.

Highlights from the management commentary

* The management feels gross margin (GM) has bottomed out in 1Q and ought to recover in 2Q, with performance likely to be much better in 2HFY22. GM in FY22 may be slightly lower than FY21 levels.

* The management plans to undertake aggressive cost rationalization in FY22 as well (saved INR1.5-2b last year). Better Analytics, inventory efficiencies (reduced 26% of SKUs in FY21), and a hybrid way of working will lead to structural cost savings.

* Update on new products: It has done very well in Honey and Noodles, with an encouraging response. Saffola Oodles is among the top five selling Pasta and Noodle brands on Amazon, while MealMaker Soya Chunks already has 14% market share in Modern Trade and is now available nationally.

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