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3QFY22 update: Sluggish rural demand dampens performance

Highlights from MRCO’s pre-quarterly update for 3QFY22

Macro view​​​​​​​

* The quarter was characterized by slowing consumption patterns, which affected the sector as a whole.

* This was largely due to a) continued inflation impacting overall disposable incomes as well as b) rising mobility unleashing some degree of pent-up demand for discretionary goods, services, and out-of-home consumption.

3QFY22 performance

* Consolidated revenue growth was in the low teens during the quarter.

* India: Revenue growth was in the double digits during the quarter, while volumes were flat, weighed by weaker consumption sentiment and a strong base.

* India rural demand was also sluggish, albeit optical, to an extent, given the high base.

International business

MRCO’s International business delivered constant-currency growth in the high teens on a healthy base. All markets fared positively, led by Bangladesh as well as smart recovery in Vietnam.

Costs and margins

* We expect the gross margin to improve sequentially, but remain lower on a YoY basis.

* The operating margin is expected to be near the levels of the preceding quarter (2QFY22 EBITDA margins: 17.5%).

* Copra prices were range-bound for most of the quarter, before correcting towards the end of the quarter.

* Edible oil prices have also started softening, while crude oil prices remain firm.

Segments

* Parachute Coconut Oil had a muted quarter on a high base.

* VAHO posted softer growth in value terms during the quarter, but has delivered double-digit value growth on a two-year CAGR basis.

* The Saffola franchise grew in the high teens in value terms, led by strong 20%+ growth in Foods – which is on course to reach the INR5b revenue mark this year. Volumes for Saffola Edible Oils dropped, largely due to higher in-home consumption in the base and weak trade sentiment from fluctuating input prices.

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

Valuation and view

* a) Ongoing topline growth momentum in each of its core segments, b) significantly higher growth rates as well as targets in the Foods portfolio, and c) INR4.5–5b targeted from its ‘Digital-first’ range of products are highly encouraging developments for a business that saw a ~6% sales CAGR during FY15–20, before reporting double-digit growth in FY21.

* The much-needed diversification could lead to higher multiples vis-à-vis those seen in the past. Valuations at 37.3x FY24E EPS appear inexpensive, given the promise of strong earnings growth v/s in the past. We target 45x Mar’24E EPS to arrive at our TP of INR655/share, implying a 27% upside. We maintain our Buy rating.

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