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Gross margin likely to have troughed

Marico (MRCO) is among India’s leading consumer goods companies operating in the Health, Beauty, and Wellness space.

Improving demand scenario:

In 2QFY22, MRCO witnessed improving demand trends across categories with the unlocking of the economy. Revenue growth in the quarter was in the low 20s, with volume growth close to the double digits on a 2-year CAGR basis. Parachute Coconut Oil delivered an in-line performance with medium-term aspirations (5–7% volume CAGR).

Value Added Hair Oils (VAHO) posted double-digit volume growth. Within Saffola franchise, Saffola Edible Oils had a muted quarter, largely due to volatility in edible oil prices leading to trade destocking. The Foods and Premium Personal Care portfolios continued to grow smartly. The International business delivered double-digit constant-currency growth as positive trends were witnessed in all markets (ex- Vietnam).

Robust new product performance:

MRCO has done very well in Honey and Noodles, with encouraging response. Saffola Oodles is among the top five selling Pasta and Noodle brands on Amazon, while MealMaker Soya Chunks already has 14% market share in modern trade (MT) and is now available nationally. Honey, Noodles and Soya Chunks are product categories that could achieve INR1b in sales.

It expects the Foods business to clock INR5b/INR8.5–10b in sales by FY22/FY24. The management targets 4–5 exclusively digital brands, with total sales of INR4.5–5b by FY24. This would be driven by organic and inorganic growth. Apart from Beardo (which is likely to achieve INR1b sales in FY22), which MRCO acquired a few years ago, it acquired ‘Just Herbs’ in Jul’21. Margins could be significantly higher for this platform.

Key segments to perform well:

VAHO could deliver double-digit growth for the remaining three quarters, despite being flattish on a two-year basis in 1QFY22. Saffola Edible Oils could deliver higher single-digit volume growth over the medium term. Livon and Set Wet are likely to recover in FY22, and the targeted growth for these brands is over 20% going forward. Ecommerce is an incremental opportunity, but MT and general trade (GT) also present massive opportunity for growth (as their penetration is low).

Gross margin to revive:

An unprecedented increase in material costs was observed in 1QFY22. While copra prices have stabilized, edible oil prices remain elevated. Very high commodity inflation and a high base make the management cautious about growing at 20% levels in FY22. However, with the price increases taken, gross margins are likely to revive in 2Q. The management plans to undertake aggressive cost rationalization in FY22 as well. It saw INR1.5–2b in savings last year. Better analytics, inventory efficiencies (reduced 26% of SKUs in FY21), and a hybrid way of working would lead to structural cost savings.

Valuation and view:

Sustained topline momentum, with improving margin prospects over the trough seen in 1QFY22, has led to an improved outlook. a) Ongoing topline growth momentum in each of its core segments, b) significantly higher growth rates/targets in the Foods portfolio, and c) INR5b targeted from the ‘Digital-first’ range of products are highly encouraging developments for a business that had an only ~6% sales CAGR over FY15– 20, before it reported double-digit growth in FY21. This much required diversification could lead to higher multiples compared to past. Valuations at 48.9x FY23E EPS is reasonable given strong earnings growth expectation. Maintain Buy with TP of INR635/share (50x Sep’23E EPS)

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