Buy Marico Ltd For Target Rs.640 - Emkay Global
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Steady volume trends; margins to improve sequentially
* Marico reported an in line performance, with sales growing by 22% to Rs24.2bn and PAT by 6% to Rs3.2bn. The India business grew by 24%, with 8% volume growth (2-year volume CAGR of 9%). Margins were lower by 190bps on high cost inflation.
* Management highlighted some moderation in rural markets toward Q2-end, but expects it to be transient. It continues to target double-digit growth, with mid-single digit volume growth in the near term. Core brands are likely to be steady, while food and D2C brands are expected to sustain robust growth momentum.
* Gross margins are expected to improve further sequentially, with the softening in copra prices. Incremental cost savings are expected from new initiatives beginning in Q4, which should help improve operating margins.
* Volume growth momentum has been better than peers, and management remains aggressive in adding new vectors of growth. Valuations are attractive relative to peers. Retain Buy with a revised Dec’22 TP of Rs640 (48x Dec-23E EPS).
Strong performance led by foods and share gains: Overall sales grew by 22%, with 8% domestic volume growth; 2-yr sales/volume CAGRs were 15%/9%. Parachute/Saffola/VAHO sales grew 18%/16%/46%. Parachute volumes grew by 7%, while management indicated muted volumes in edible oils. Rural performance was ahead of urban yoy, but witnessed a moderation qoq. Alternate channels grew in double-digits, and CSD recovered on a low base. Growth in Parachute and VAHO was due to higher penetration levels and increasing salience in mild and premium segments, respectively. Scale-up of foods (up 70% yoy) through entry into new markets and growing presence across alterative channels are positives. The premium personal care range recorded double-digit growth, indicating a strong recovery. The D2C brands are on track to clock Rs5bn in sales by FY24. Management indicated that it is targeting 15%/10% revenue/volume growth in the medium term.
Margin pressure to recede from Q3/Q4: Gross margin declined sharply by 560bps yoy, driven by 59%/30%/26% rise in rice bran/LLP/HDPE prices. Most input prices (copra, LLP and HDPE) are expected to remain range-bound as the supply improves, while rice bran oil prices remain under pressure. Operating margin decline was softer at 210bps, led by lower ad spends and other overhead costs (as a % of sales). Gross margins are expected to improve sequentially in Q3 and Q4, while operating margin improvement is expected to play out in Q4 on benefits from cost rationalization.
Growth outlook better than peers; maintain Buy: Stable growth outlook in core brands with market share gains, step-up in foods, digital-first brands, and growing distribution network provide a positive growth outlook overall. Margin pressure is likely to recede in H2 and earnings momentum should also see an improvement. Maintain Buy with a slight increase in TP to Rs640 from Rs630, valuing the company at 48x Dec-23E EPS.
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