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Continued share gains in PCNO/VAHO and strong traction in foods, margins to improve from 4Q; maintain BUY

Our view

The key positives for the quarter were strong volume growth in PCNO and VAHO leading to market share gains despite significant price hikes. Saffola edible oil growth normalized from a high base caused by inventory destocking and lower in‐home consumption while recovery momentum continued in premium personal care portfolio and foods business which is set to clock Rs 5bn turnover in FY22 (in a Rs 50bn addressable market) aided by entry in new segments like honey, noodles and soya chunks. Company is also focusing on digital‐first business with an aspiration of reaching Rs 4.5‐5bn revenue by FY24 via organic and inorganic means.

While margins can remain under pressure in 3Q with an expected increase in ad spends, margin improvement should begin from Q4FY22 supported further by another round of price hikes. International business also continues to deliver resilient performance despite disruption led by pandemic in Vietnam. We find management’s focus on expanding Foods portfolio and digital first brands, aggressive expansion in rural stockist network and eCom/MT channels encouraging and hence continue to remain positive on the stock believing that the company would remain one of the fastest growing names in the staples pack.

Result Highlights

* Revenue – 24% growth in domestic business with 8% volume growth, 13% CC growth in international business driving 21% consolidated revenue growth (2‐yr CAGR of 15%); market share gains of 180bps in Parachute and 40bps in VAHO.  

* Margins – 550bps GM decline (rice bran oil, LLP, HDPE inflation, copra prices cooled off) leading to 210bps EBITDA margin decline to 17.5%; margin contraction was restricted given aggressive price hike across the portfolio, 11% QoQ increase in A&P spends.

* Growth by verticals – 7% volume and 18% value growth in Parachute on base of 10% and 8% growth, 16% value growth in VAHO on base of 1% decline and 46% value growth in Saffola on base of 16% value growth.

* International business – 13% CC growth with 80bps margin expansion to 24.1% with 16% growth in Bangladesh, 20% growth in MENA, 8% in SA and 2% decline in South East Asia. 

Valuation

We model in revenue/EBITDA/PAT CAGR of 14%/16%/17% over FY21‐24E driven by multiple levers like further share gain possibilities in Parachute portfolio, strong momentum for Saffola edible oils and foods portfolio, recovery in international markets and continued strengthening of distribution and digital infrastructure. We maintain our BUY rating with a PT of Rs 647 based on 45x FY24E EPS, a 10% premium to its 5‐yr average multiple and in‐ line with the multiples given to peers like GCPL, Tata Consumer and Dabur.

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