Hold Marico Ltd For Target Rs.685 - ICICI Direct
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Massive cost inflation puts brakes on Saffola growth…
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 million outlets and direct reach of ~1 million outlets. Through its stockist network, it reaches 58000 villages
* With high gross margins of ~50%, the company is able to spend 8-9% of its sales for advertisements to support new categories & products
Q2FY22 Results: Marico reported strong revenue growth largely led by price hikes.
* Sales were up 21.6% YoY with 8% volume growth & 15% price hike
* EBITDA was at | 481 crore, up 3.1% YoY, with margins at 17.5%
* PAT was at | 316 crore (up 15.8% YoY due to one-time expense in base)
What should investors do? Marico’s share price has given 116% return in the last five years (from | 261 in October 2016 to | 570 in October 2021)
* We largely maintain our numbers expecting normalisation in commodity prices & sustained volume growth
* We continue to maintain our BUY rating on the stock
Target Price and Valuation: We value the stock at | 685 on ascribing 55x FY24 earnings multiple.
Key triggers for future price performance:
* Robust growth in foods, digital brands & edible oil portfolio led by tailwinds of healthy eating habits. Foods portfolio to clock | 500 crore in FY22
* Market share gains in parachute given smaller, regional brands find it difficult to pass on sharp commodity price fluctuations (up or down)
* Likely to maintain margins in the longer run with eventual normalisation in commodity prices
* 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 & aggressively foray in many big categories (edible oil, carbonated drink, household insecticides, fruit drinks) would be driving growth for Dabur
* Value the business at 55x FY24 earnings. BUY with a TP of | 740
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