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Commodity basket trending down; margin to inch up

About the stock: Marico is one of the major FMCG companies present in hair oil, edible oil, foods & personal care segment. Major brands include Parachute, Saffola, Nihar, Hair & Care, Set Wet, Livon & Beardo.

* Marico has an overall distribution network of more than 5.6 million (mn) outlets and direct reach of ~1 mn outlets. Through its stockist network, it reaches 59000 villages

* With high gross margins of 45-50%, the company is able to spend 8-9% of its sales on advertisements to support new categories and products

Q2FY23 Results: Marico posted dismal results with 3.2% sales growth.

* Sales were up 3.2% YoY led by 16% growth in international business

* EBITDA was at | 433 crore, up 2.4% YoY, margins at 17.3% (down 14 bps)

* PAT was at | 307.0 crore (down 2.9% YoY)

What should investors do? Marico’s share price has given 73% return in the last five years (from | 310 in October 2017 to | 539 in October 2022).

* We believe hair oil product portfolio would grow at a slow pace considering highly penetrated category whereas foods, digital brands to drive growth

* We maintain our HOLD rating on the stock

Target Price & Valuation: We value Marico at | 560 ascribing 50x PE on FY24 EPS.

Key triggers for future price performance:

* Foods portfolio has grown at a robust pace in last two years led by tailwinds of healthy eating habits & foray in multiple categories. Foods portfolio to grow to | 650 crore sales in FY23

* Continuous price cuts are slowing down unorganised to organised conversion. Moreover, hair oil category growth is saturated

* Saffola edible oil three-year CAGR volume growth is 7%. With softening of inflation, volume growth is expected to come back to mid-single digit compared to a dip in the last one year

* Inventing in digital only brands. Aims to achieve | 500 crore sales by FY24

Alternate Stock Idea: We also like Dabur in our FMCG coverage.

* Significant shift in consumption towards healthier, natural & Ayurveda based products & aggressive foray in many big categories would be driving growth for Dabur

* Value the business at 55x FY24 earnings. BUY with a TP of | 700

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