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Domestic volume growth surprises

* Revenue growth was ahead of expectations, driven by strong domestic performance with 15% volume growth. PAT grew 13%, in line with estimates due to a slight miss on the margin front stemming from higher input prices and opex.

* Management’s commentary was fairly positive and it expects to deliver over 20% revenue growth in Q4 on low comparables and double-digit growth in the medium term. Saffola should continue to drive a high single-digit growth, while VAHO issues have been fixed and should sustain double-digit growth.

* High input prices resulted in a slight miss on margins, but input inflation is expected to moderate with copra prices softening from the peak levels. Price hikes in Saffola and Parachute effected in Q3 should also result in a better margin performance ahead.

* We raise estimates marginally by 2-3% for FY21-23, given improved performance and better growth outlook. At current valuations of 34x FY23E EPS, the stock looks fairly valued. Maintain Hold with revised TP of Rs420, rolling forward to Mar-23E EPS.

Saffola continues strong momentum; VAHO sees a turnaround: Marico’s Q3 sales performance came in even stronger than Q2, with its domestic business growing 18%, driven by 15% volume growth. Parachute’s volumes grew 8% and VAHO saw a huge turnaround with 21% volume growth (vs. 4% in Q2), led by market share gains. Saffola oil posted 17% volume growth and Saffola oats clocked 50% value growth with an increase in market share and scale-up of new launches. Saffola honey ended the quarter with a double-digit market share in MT and over 20% in the e-commerce channel. The international business grew 11% (8% in cc), with Bangladesh/South Africa growing 15%/7% in cc terms, while Vietnam declined 3%. Management commentary remains fairly positive with double-digit growth likely to continue, also aided by recent pricing actions. Consumer offers were rolled back for parachute in December, while Saffola saw multiple rounds of price increases to the tune of 15%.

High input inflation impacts margins; prices expected to moderate: Gross margin contracted by 220bps due to a rise in input prices, particularly copra and rice bran. EBITDA margin was reduced by 100bps, with a 28% increase in employee costs, led by higher incentive programs and Beardo employee acquisition costs which were not present in the comparable period a year ago. Employee costs are expected to remain high in Q4. Management expects copra inflation to moderate with prices correcting by 10-15% in the coming quarters. Cost savings are likely to continue and provide a stable margin outlook.

Improving performance drive earnings upsides; maintain Hold: We raise estimates marginally by 2-3% for FY21-23E, given improved performance and better growth outlook. At current valuations of 34x FY23E EPS, the stock looks fairly valued. Maintain Hold with a revised TP of Rs420 (from Rs380), rolling forward to Mar-23 EPS.

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